Every day, hundreds of lawsuits are filed against small business owners who have defaulted on their Merchant Cash Advances (MCA) or term loans. And everyday we encounter small business owners who seemingly have the same misunderstandings about MCA lawsuits. What makes it harder for small business owners when they are sued is brokers, MCA collections companies, MCA companies, and shady settlement companies who do not know what they are doing guide small business owners in the wrong direction, ultimately adding insult to injury.
In this article, we provide 5 common mistakes that small business owners make when they are sued by MCA and loan companies. Further, we provide some insight on what small business can do to avoid these mistakes.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
Defaulting on a Merchant Cash Advance is Common
When the Securities and Exchange Commission shut down Complete Business Solutions Group dba Par Funding, they unpacked tons of MCA files which estimated that more than 50% of MCA clients default on their merchant cash advances.
We believe this number to be accurate. We believe this number is accurate because of the elementary “underwriting” which MCA companies use to approve or decline their merchants who are interested in “borrowing money.” Because MCAs are not loans, the MCA companies have no standards for which to assess the risk associated with purchasing future receivables. Instead, these companies rely mainly on 3 months of business bank statements, for which they ask for from small business owners.
In their infinite wisdom, these risk officers analyze “cash flow” by using the business bank statements, which offer a remarkably limited amount of information regarding the business’ organizational health, or the ability for the business to pay back debt.
With a lack of either ability or wanting to understand a company’s ability to service their debt, MCA companies take high risks by purchasing future receivables, hoping to collect funds quickly and with a high amount of profit. MCA companies abuse small business owners by greedily charging $0.50 or more on the dollar, offering short term payback periods which make payments untenable, as well as offering daily payments without any type of consideration for increases or decreases in revenue.
Hence, the small business owners’ default and are sued and subject to UCC enforcement causing a mess.
MCA default enforcement is a mess.
When the small business owner defaults, in most cases, their lives are turned upside down. Either by being subject to a lawsuit in a foreign state or UCC enforcement, clients can have many things happen:
Harassment;
Frozen vendor accounts;
Frozen bank accounts;
Clients harassed;
In some cases, a receivership is placed on the business;
Judgment;
Domestication;
Much more.
And when business owners begin to deal with the MCA companies’ actions, they make common mistakes.
Below, we identify 5 common mistakes that small business owners make and offer alternative ideas.
5 mistakes that small business owners make about MCA Lawsuits
I was not served so I can avoid the MCA companies’ lawsuit.
We often hear from small business owners that they were not served their lawsuit, so any lawsuit is not valid or does not mean anything unless they are served.
The truth is that most small business owners give way to their right to be served in their MCA agreement. In essence, small business owners sign away affirmation of service in their agreements. In most cases small business owners agree to having any lawsuit mailed or emailed to their email. Also, most MCA agreements do not require the mail to be certified or the email to have a return receipt. Our firm meets clients who have been sued and have judgements and they do not even know it.
The Nugget
If you default on your MCA(s), you will likely be sued. Do not waste time waiting for your service. Understand your MCA agreement. Wasting time can only lead to a judgement, which you DO NOT want.
It is important that you speak with a firm like Ours or an attorney in the State you are being sued in as not doing something can be deadly.
I can avoid action because I was sued but I closed my business.
This is a common tactic that small business owners try regularly. However, little good does it do because in most cases, not only is your business being sued, but you most likely personally guaranteed the money you owe the MCA company. So, you will be sued personally as well meaning if you receive a judgement, the MCA company can go after your personal assets and garnish your future wages.
The MCA lawsuit will also find its way onto your credit report (business and personal) which can hurt your ability to operate your new business.
Finally, when small businesses close operations and open a new entity, most MCA companies will find out through clearinghouses like LexisNexis.
The Nugget
Do not close your business because you were sued. Speak with a team of experts or an attorney who will provide triage support to you and your business.
"I can get a better deal on my own than working directly with the MCA support company."
We see business owners get sued by an MCA company and within days they are negotiating settlements with MCA attorneys and collections representatives. The Center for MCA Research has found the following:
88.2% of all settlement agreements not involving an attorney or experienced settlement agent were settled at or worse than the original MCA agreement.
68.6% of settlements made by business owners are defaulted on.
9.1% of all lawsuits which are answered by professionals/attorneys reach judgement. That is, more than 9 in 10 settlements which are handled by firms like ours are able to avoid judgements for the small business owner.
Working with an attorney or firm like Beacon almost always guarantees better terms in settlement. In turn, firms like Beacon ensure that the MCA company is repaid in good faith. Most MCA companies operate using any leverage they can, fear, and unprofessional tactics. These companies are ruthless and do not care about the person behind the small business and their story. Companies who specialize in helping small businesses can and will push back and protect the small business owner from harassment and the MCA company’s tactics.
The Nugget
So, in most cases, small business owners will NOT get a better deal and their savings which they think they will make by doing things on their own usually never produce savings and in most cases cost way more with either a bad deal or judgement.
The MCA company, brokers, and collections companies are your friends.
Remember, the business of business is business. MCA companies are supported by their investors. You may be friendly with a rep, but once the investor is not being repaid, it will turn vicious. Same with the “funder,” collections folks, attorneys…. Etc. They are not your friends.
The Nugget
Unless you operate by the saying, the enemy of my enemy is my friend, this is never the case. MCA companies, brokers, and collections companies have one goal. Get you to pay by any and all means necessary. This includes harassment, lying, legal action, UCC enforcement, destroying your business, and liquidating your assets.
I am being sued but I am going to get more funding to pay the MCA lawsuit.
Once you have defaulted on a Merchant Cash Advance, or lowered payments, or even missing payments, you are not getting funded by anyone else. So, when small business owners are offered the world by brokers and sales agents, take it from our experience, you are not getting funded.
Funders like MCA companies and loan companies have access to data from the company you have defaulted with. This includes SBA loans and bank loans.
The Nugget
Once you default, you are done getting funded. Trying to get funding will only degrade your credit and have your personal information shared around the internet with 3rd parties.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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