MCA Relief | Setting Merchant Cash Advance Debts

Merchant cash advances (MCAs) are an alternative financing option that provides businesses with a lump-sum upfront payment in exchange for a percentage of the business's future credit card or debit card sales. The key features of merchant cash advances include:

Structure

• The MCA provider gives the business owner a one-time lump-sum payment, typically ranging from $5,000 to $500,000.
• In return, the business agrees to repay the advance by allowing the MCA provider to take a percentage (typically 10-20%) of the business's future credit/debit card sales until the loan is paid off, plus applicable fees.
• The repayment is made through daily or weekly automatic withdrawals from the business's credit/debit card receipts.

Repayment

• There is no fixed repayment schedule. The business repays the advance as a daily/weekly sales percentage until the total amount is collected.
• If sales are slow, the repayment period is extended. If sales are strong, the advance is repaid more quickly.
• The business continues making these percentage-based repayments until the MCA provider collects the total advance amount plus fees.

Fees

• The MCA provider gives the business owner a one-time lump-sum payment, typically ranging from $5,000 to $500,000.
• In return, the business agrees to repay the advance by allowing the MCA provider to take a percentage (typically 10-20%) of the business's future credit/debit card sales until the advance is repaid, plus applicable fees.
• The repayment is made through daily or weekly automatic withdrawals from the business's credit/debit card receipts.

MCAs provide upfront lump-sum financing in exchange for a percentage of a business's future credit/debit card sales until the debt and funder's fees are repaid.

Advantages of MCA Loans

MCAs can offer a lifeline to businesses needing quick cash, but several downsides often lead businesses to seek relief from these arrangements. Here are some pros to how MCAs provide relief:

• Quick Access to Capital: MCAs provide businesses with fast access to funds, which can be crucial in situations requiring immediate cash flow, such as emergency repairs, seizing a business opportunity, or covering unexpected expenses.
• No Need for Collateral: Unlike traditional loans, MCAs do not require collateral, making them accessible to businesses that might not have assets to secure a loan.
• Flexible Repayments: Repayments are tied to the business's sales volume, offering some flexibility. During slower sales periods, the repayments decrease, which can help businesses manage cash flow more effectively.

Downsides of MCAs

Disadvantages of MCAs often overshadow their benefits, primarily due to their cost and repayment terms:

• High Costs: MCAs can be significantly more expensive than traditional financing options. The cost of capital for an MCA is often much higher, with annual percentage rates (APRs) that can soar into triple digits. This high cost is due to the factor rate applied to the advance, which differs from a traditional interest rate and can confuse borrowers.
• Aggressive Repayment Terms: An MCA's repayment structure can be aggressive, with daily or weekly debits from the business's bank account. This can strain cash flow, especially if the business's sales do not meet projections.
• Cycle of Debt: Due to the high costs and aggressive repayment terms, businesses often find themselves in a cycle of debt. When the initial advance depletes and the business still needs cash, taking out another MCA might seem like the only option, leading to further indebtedness.
• Lack of Federal Regulation: MCAs are not subject to the same regulatory oversight as traditional loans, which can leave businesses vulnerable to predatory lending practices. The terms and conditions of MCAs can be complex and challenging to understand, leading some businesses to agree to unfavorable terms without fully realizing the implications.

Seeking MCA Relief

Due to these downsides, businesses often seek relief from MCA obligations. MCA relief can involve:



• Restructuring the MCA agreement.
• Consolidating MCA debt into a traditional loan with lower interest rates.

In most cases, a business should seek legal advice to explore options for mitigating the burden of MCA debt. Businesses might also consult financial advisors to improve cash flow management and avoid future reliance on costly financing options.

The Path to Needing MCA Relief

Businesses can often find themselves struggling with merchant cash advance (MCA) debt due to the following key factors:

Unsustainable Repayment Schedules

• MCAs require daily or weekly automatic withdrawals from the business's credit/debit card receipts, typically 10-20% of sales.
• If a business experiences a downturn in sales, the fixed percentage repayment amount can become unsustainable, as the business has less revenue to cover its other expenses.
• The lack of a fixed repayment schedule means the business may repay significantly more than the original advance amount due to compounding fees and factor rates.

Impact on Business Operations

• The automatic daily/weekly withdrawals can create cash flow problems for businesses, as they may need more remaining revenue to cover payroll, rent, inventory, and other critical operational expenses.
• This can lead to a vicious cycle where the business struggles to maintain operations, further depressing sales and making the MCA repayments even more challenging to manage.
• Some MCA providers use aggressive debt collection tactics, which can also disrupt normal business operations and damage relationships with customers and vendors.

Debt Traps and Refinancing

• Businesses struggling with MCA repayments may be tempted to take out additional advances to cover shortfalls, further compounding their debt burden.
• Repeated refinancing of existing MCA debt can lead to a debt trap, with businesses paying ever-increasing factor rates and fees.
• This can make it extremely difficult for the business to pay off the MCA debt fully and regain financial stability.

Lack of Transparency and Understanding

• Some business owners may not fully understand the complex terms and repayment structure of MCAs, which can lead to unexpected financial challenges.
• The lack of a standardized interest rate can make it challenging to compare MCA offerings and assess the actual cost of the financing.

The flexible but expensive nature of MCAs, combined with the automatic repayment structure and aggressive debt collection tactics, can create significant cash flow problems and operational disruptions for businesses, potentially trapping them in a cycle of unsustainable debt. Careful evaluation of the MCA terms and the potential impact on the business's finances is crucial before pursuing this type of financing.

Does Your Business Need MCA Relief

Here are some key indicators that suggest a business should consider seeking relief from its merchant cash advance (MCA) debt:

Inability to Meet Daily Obligations

• Due to the daily/weekly MCA repayment withdrawals, the business is struggling to cover regular operating expenses like payroll, rent, and inventory.
• The business is frequently overdrawing its bank accounts or relying on late payments from customers to cover basic expenses.

Constant Refinancing of MCAs

• The business continuously seeks new MCA advances to pay off existing MCA debt, often at increasingly unfavorable terms.
• This "debt treadmill" indicates that the business cannot generate enough revenue to pay off the MCA debt.

Deteriorating Financial Health

• The business is experiencing declining sales, profit margins, and cash flow, making it increasingly difficult to meet MCA repayment obligations.
• Due to the MCA repayment demands, the business needs to catch up on payments to vendors, employees, or other creditors.
• The business's credit score and relationships with lenders suffer due to the MCA debt burden.

Aggressive Debt Collection Tactics

• The MCA provider employs aggressive tactics like constant phone calls, threats, or even legal action to collect on the debt.
• These tactics disrupt the business's everyday operations and relationships with customers and vendors.

Missed MCA Repayments

• The business must consistently catch up on scheduled MCA repayment withdrawals, triggering additional fees and penalties.
• This indicates that the business needs more financial capacity to meet the MCA repayment requirements.

Suppose a business is experiencing several of these indicators. In that case, it may be time to consider seeking professional assistance or exploring alternative debt relief options, such as renegotiating MCA terms, consolidating debt, or pursuing legal remedies. Proactively addressing the MCA debt burden can help the business regain financial stability and focus on its core operations.

Legal Solutions for MCA Relief

An MCA defense attorney can be instrumental in helping businesses find relief from unmanageable MCA debt. The attorney can first attempt to renegotiate the MCA repayment terms, potentially lowering the daily/weekly withdrawal percentage, extending the repayment period, or reducing the overall factor rate to make the debt more manageable.

Suppose the MCA provider is engaged in predatory lending practices, breaches of contract, or other unlawful behavior. In that case, the attorney can pursue litigation to challenge the MCA agreement and seek debt forgiveness or a more favorable settlement. 

As a last resort, the attorney can guide the business through bankruptcy, either under Chapter 11 to restructure the MCA debt or Chapter 13 to establish a court-approved repayment plan. With the expertise of an MCA defense lawyer, businesses trapped in unsustainable MCA debt can regain their financial footing and focus on their core operations.

Restructuring MCA Loan Terms

A law firm can negotiate with MCA lenders on behalf of a struggling business in several ways to potentially modify the repayment terms and provide relief:

Renegotiate the Repayment Percentage

• The law firm can negotiate with the MCA provider to lower the daily or weekly percentage taken from the business's credit/debit card sales.
• This can give the business more cash flow to cover operating expenses while maintaining repayments.

Extend the Repayment Period

• The law firm can request that the MCA provider extend the overall repayment timeline, reducing the daily/weekly withdrawal amounts.
• This can make the repayments more manageable for the business, especially if sales are temporarily depressed.

Reduce the Factor Rate

• The law firm may be able to negotiate a reduction in the high factor rate charged by the MCA provider, which can significantly lower the total repayment amount.
• This can help the business pay off the debt faster and at a lower overall cost.

Restructure the Repayment Schedule

• The law firm can propose an alternative repayment schedule, such as fixed monthly payments or a temporary repayment holiday, to give the business more financial flexibility.
• This can help the business avoid the constant cash flow disruption of daily or weekly withdrawals.

Secure a Partial Forgiveness or Settlement

• In some cases, the law firm may be able to negotiate a partial forgiveness of the outstanding MCA debt or a lump-sum settlement for less than the total amount owed.
• This can relieve the business and allow it to start fresh.

Consolidate or Refinance the MCA Debt

• The law firm can help the business consolidate or refinance its MCA debt with a more favorable lender, potentially lowering the overall cost of the financing.

The key is for the law firm to leverage its negotiating expertise and the business's specific financial situation to rework the MCA repayment terms to provide meaningful relief and allow the business to regain its financial footing. Proactive and strategic negotiations can be crucial for businesses struggling with unmanageable MCA debt.

MCA Litigation

There are specific scenarios where legal action may be necessary for a business struggling with unmanageable merchant cash advance (MCA) debt:

Predatory Lending Practices

• If the MCA provider engaged in predatory lending tactics, such as:
• Failing to disclose the true cost of the financing clearly
• Targeting the business with aggressive sales tactics despite knowing the business could not afford the repayments
• Deceiving the business about the terms and conditions of the MCA
• The business may have grounds to file a lawsuit against the MCA provider for predatory lending.

Breaches of Contract

• If the MCA provider fails to uphold the terms and conditions of the MCA agreement, such as:
• Withdrawing more than the agreed-upon percentage of daily/weekly sales
• Failing to provide the total advance amount as promised
• Engaging in unauthorized withdrawals or debt-collection tactics
• The business may be able to take legal action for breach of contract.

Usurious Interest Rates

• Some states have usury laws that cap the maximum interest rate that can be charged on loans.
• Suppose the effective interest rate on the MCA, as calculated by the total repayment amount, exceeds the state's usury limit. In that case, the business may have grounds to challenge the MCA as illegal.

Harassment and Intimidation

• If the MCA provider harasses, threatens, or intimidates the business owner or employees, the business may be able to take legal action for harassment or abuse.

Improper Debt Collection Practices

• The MCA provider may be subject to state and federal debt collection laws, such as the Fair Debt Collection Practices Act.
• If the provider violates these laws through tactics like constant phone calls, false threats, or other abusive practices, the business may have recourse through the legal system.

In these scenarios, the business would likely need to retain an experienced attorney specializing in commercial litigation, consumer protection, or financial services law. The attorney can review the MCA agreement, assess the provider's actions, and determine the appropriate legal strategy to seek relief, including filing a lawsuit, negotiating a settlement, or pursuing regulatory action.

Engaging legal counsel can be crucial for businesses facing unmanageable MCA debt and predatory practices. It can help them regain financial stability and protect their rights.

Bankruptcy Considerations

Bankruptcy can offer a potential avenue for relief from unmanageable merchant cash advance (MCA) debt, though the specific implications depend on the type of bankruptcy filing.

Chapter 11 Bankruptcy

• Chapter 11 bankruptcy is a reorganization bankruptcy primarily used by businesses.
• It allows the business to restructure its debts, including MCA obligations, under the protection of the bankruptcy court.
• In a Chapter 11 filing, the business can renegotiate the terms of the MCA debt, such as reducing the repayment percentage or extending the repayment period.
• This can give the business a more manageable cash flow and the opportunity to return to profitability.
• However, Chapter 11 can be complex and expensive, and the business remains subject to court oversight during the restructuring.

Chapter 13 Bankruptcy

• Individuals primarily use Chapter 13 bankruptcy, which can apply to small businesses structured as sole proprietorships or partnerships.
• In a Chapter 13 filing, the business owner proposes a repayment plan to the court, outlining how they will pay off their debts, including any MCA obligations, over 3-5 years.
• The court must approve the repayment plan, which can involve reducing the MCA repayment percentage, extending the repayment timeline, or even partially discharging the MCA debt.
• Chapter 13 bankruptcy provides the business owner with automatic stay protection, halting all debt collection efforts during the repayment plan.
• However, the business owner remains responsible for making the agreed-upon payments to the court-approved trustee throughout the repayment period.

It's important to note that bankruptcy should be considered a last resort, as it can have significant long-term consequences on the business's credit and future financing prospects. Consulting with a bankruptcy attorney is recommended to determine if a bankruptcy suits the business's specific MCA debt situation.

Merchant Cash Advance Debt Relief

Addressing merchant cash advance (MCA) debt proactively is crucial for businesses struggling with unmanageable repayment schedules and the negative impact on their operations. If left unchecked, MCA debt can quickly spiral into a vicious cycle, trapping the business in a downward financial spiral.

However, with the right legal approach, businesses can find a path to relief and transformative change. An experienced MCA defense attorney can leverage their expertise to renegotiate repayment terms, challenge predatory lending practices, or even restructure the debt through bankruptcy proceedings. By taking decisive action, businesses can regain control of their finances, free up crucial cash flow, and refocus on driving growth and profitability.

If your business is burdened by overwhelming MCA debt, don't wait for the situation to worsen. Contact J. Singer Law Group today for a detailed assessment of your situation and to explore the legal strategies to help turn your financial outlook around. Our team of MCA defense specialists is standing by to provide the guidance and support you need to reclaim your business's financial health and future success.