Many small business owners are unaware of the consequences when taking out one or more Merchant Cash Advance(s) (MCAs). The high payback amounts and short repayment periods can severely impact small businesses' operations. Despite some small business owners mistaking MCAs for loans, they lack the same protections, leaving them vulnerable once they struggle to repay their advances. Consequently, business owners may face legal actions or asset freezes in a different state shortly after defaulting on their MCAs. This article outlines what small business owners can anticipate (referred to as the MCA playbook) when encountering difficulties with their Merchant Cash Advances.
Thomas Tramaglini, Chief Operations Officer
Partner, Center for MCA Research
Because Merchant Cash Advances are not loans, their playbook for dealing with defaults is different.
Merchant cash advances (MCA) differ from loans in that they are not subject to the same regulations imposed by the Federal Government on lenders. MCAs involve the purchase of future sales from small businesses at a significant discount, with harsh terms for the business owner and unregulated methods for recovering funds from defaulting clients.
Some MCA companies and their collections agencies can be aggressive, unpleasant, and unreasonable. It is ironic that while MCA companies benefit from the lack of regulation, they resort to legal action against small business owners when clients default.
You have a real hardship. The MCA company does not care.
The MCA companies have encountered numerous accounts and justifications for why small business proprietors struggled to repay or defaulted on their advances. Ultimately, the MCA company and their investors expect prompt repayment with substantial returns. Failure to make payments will prompt the MCA company to pursue you aggressively, resorting to actions such as freezing assets, garnishing wages, and causing significant distress. These individuals, who exhibit predatory behavior, aim to exploit you by offering a seemingly favorable deal with a 50% discount (representing their profit margin). However, if you are unable to meet the repayment terms, they will adopt a merciless approach.
The MCA company and their legal representatives will exert significant pressure on you in order to force you to comply.
When facing difficulties with your MCA, the MCA companies will apply immense pressure until you either resume a program you couldn't afford, agree to a new settlement, or they obtain a court judgment to initiate asset seizure and liquidation in your state to recover their funds.
You, as well as your family, friends, customers, and vendors, will face harassment.
One tactic employed by MCA companies to pressure you is relentless harassment directed at you, your family, friends, customers, vendors, and any other contacts in order to coerce compliance.
Most MCA agreements grant permission for this harassment of you and the mentioned parties, along with the ability to file a UCC lien against you, which can lead to informing your customers not to pay you and your vendors not to supply you. The harassment intensifies once a UCC lien is filed, sometimes even involving threats, creating a distressing and inappropriate situation.
UCC Liens
The Uniform Commercial Code (UCC) comprises a set of laws governing commercial transactions that are universally accepted across all states in the United States. Lenders and Merchant Cash Advance companies utilize UCC filings to assert their rights to collateral or liens on a loan or tangible property.
In many cases, MCA companies file UCC liens against small business owners who struggle to repay their loans or cease payments. Small business owners often find it challenging to address this issue, and if facing legal action, it is advisable to check for a UCC filing against them using our tool and seek guidance on the next steps.
How can UCC liens impact your business?
UCC liens signal to others that you have a security interest lien.
They hinder further borrowing opportunities.
They can lead to negative credit implications for your business.
Assets pledged for recovery may be affected by UCC liens.
Aside from filing a UCC lien, MCA companies will initiate legal action against the small business owner in the hope of prompting immediate settlement or the initiation of a payment plan to halt the lawsuit. The MCA company also anticipates that the small business owner will not respond to the lawsuit. In states like New York, where the data below illustrates the monthly lawsuit filings this year, over 90% of lawsuits go unanswered, allowing the MCA company's attorney to obtain a judgment from the court clerk (not the judge). This judgment empowers the MCA company to pursue the small business owner and their assets, regardless of their location.
MCA Companies anticipate that you will either be unaware or pretend to be.
When MCA companies start pursuing their dues, they expect the small business owner to ignore them, leading to the filing of UCC liens and lawsuits against the client. Subsequently, the business's incoming revenue may be frozen, allowing the MCA company to legally access these funds.
In many instances, MCA companies are not obligated to personally serve you with a lawsuit as per the terms of the agreement you signed, which may allow them to mail or email the lawsuit to you.
It is crucial to address your MCA debt promptly before it escalates.
From Judgments to Domestication
Upon receiving a judgment from an MCA company, they will start locating and seizing your assets until the debt is settled. MCA companies can seize various assets, including cars, secondary real estate, jewelry, personal items, frozen funds under UCC, and funds in bank accounts.
If you are not in the state where the judgment was issued, states have domestication procedures to enforce judgments in the business owner's state. In cases of asset concealment, domestication attorneys for MCA companies can file discovery motions compelling the business owner to disclose assets for collection.
Here are a few examples of current domestication cases from MCA companies:
It's important to be aware that attempting to deceive or conceal assets during a court-ordered domestication process can lead to criminal charges for business owners.
The MCA company will file a lawsuit in a state that is favorable to them, not you.
Oftentimes, clients inform us that they already have legal representation. It is crucial to note that anyone facing a lawsuit must engage an attorney who is licensed to practice law in the state where the legal action is taking place. For instance, if the lawsuit is in New York, you cannot hire a Texas-based attorney unless they are authorized to practice law in New York State.
Companies such as ours provide legal services, and it is highly recommended that you opt for one of our attorneys through our programs. Our legal professionals are well-versed in MCA law and possess the expertise to handle any legal scenario effectively.
MCA companies hope you will try to answer the lawsuit by yourself.
Most states mandate that business owners respond to lawsuits with the assistance of an attorney. While there are affordable self-response lawsuit software options available, caution is advised. In certain states, small business owners are not permitted to self-respond to lawsuits, and typically, handling a lawsuit independently often results in an unfavorable judgment.
MCA companies prefer that you resolve your debt through their attorney or collections agency.
Once you are sued or have a UCC lien filed against you, seeking assistance is crucial. While individuals who directly engage with the MCA company can potentially negotiate a settlement and help themselves, the downside is that these individuals have already been sued, putting them at a disadvantage compared to the MCA lender and their legal representation. If issues arise before the repayment is completed, the consequences can be significantly more severe in the long term. On the other hand, settlement companies and attorneys possess the necessary knowledge and experience to deal with MCA companies and their legal representatives, resulting in generally more favorable outcomes.
It is strongly advised against settling with an MCA company or their legal team independently without first seeking advice from or retaining an attorney or a reputable settlement firm.
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 Master’s and Doctorates in Organizational Leadership from Rutgers, 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 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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