Based on information from the Securities and Exchange Commission (SEC), around 50% of small business proprietors who opt for Merchant Cash Advances (MCA) are unable to meet the required terms or payments and eventually default. In cases of MCA defaults, MCA firms and their legal representatives typically resort to legal action against both the small business owner and the business itself. Failure to address the lawsuit may lead to a judgement, essentially a court-ordered decision in favor of the MCA company, enabling them to start garnishing your funds, seizing assets, or liquidating equipment. Additionally, these judgements are not solely against the business but also against the individual, posing potential harm. This article outlines various compelling reasons why avoiding a judgement is crucial and provides strategies for small business owners to counter MCA companies.
Thomas Tramaglini, Chief Operations Officer
Partner, Center for MCA Research
When small business owners default on Merchant Cash Advances, they often get sued but fail to respond to the lawsuits, leading to a judgement being issued against them.
Every year, numerous small businesses face lawsuits from Merchant Cash Advance companies due to defaulting on their advances. Based on data collected over a 7-year period, it was revealed that around 1,100 lawsuits are filed monthly by Merchant Cash Advance companies in the State of New York (New York State Court System).
Additionally, an average of 521 MCA lawsuits were filed in other states during the same timeframe (Unicourt). Most MCA companies opt to sue both the small business and its owner personally in order to recover the lost funds. The data indicates that nearly 91% of small business owners do not seek legal representation to respond to such civil actions, resulting in a judgement being issued. Judgements can have severe consequences, causing long-term harm to business owners and their enterprises.
What Constitutes an MCA Judgment?
A judgement is essentially a court order that serves as the final decision in a lawsuit. Failure to respond to a lawsuit may lead to a judgement being issued, allowing the MCA company to initiate actions such as garnishing funds, seizing assets, or liquidating equipment. MCA companies typically file lawsuits in jurisdictions outside the business owner's home state, often choosing venues with laws that favor them, such as New York. For example, in New York, a judgement can be obtained swiftly if an out-of-state business owner fails to respond to a lawsuit within 30 days. Without legal representation, this can result in the MCA company targeting the business owner's assets. Some states, like Florida, have even shorter response times, giving business owners only 20 days to answer an MCA lawsuit.
What Are the Implications of Legally Responding to a Lawsuit?
5 Reasons to Avoid a Judgement
1. MCA companies can seize your assets and more.
Upon obtaining a judgement from an MCA company, they can start seizing your assets until the debt is settled. This could include cars, secondary properties, jewelry, personal belongings, frozen funds, and bank account balances, among others.
If you are not in the state where the judgement was issued, states have procedures to domesticate judgements, allowing MCA companies to collect in the business owner's state. If the business owner attempts to conceal assets, domestication attorneys for the MCA company can file discovery motions to uncover assets for collection.
Here are a few examples of current domestication cases from MCA companies:
***Please note that if a business owner tries to lie or hide their assets from a court ordered domestication procedure they can be subject to criminal action.
2. Both your Business and Personal Credit will suffer consequences.
Once a judgement is obtained, the majority of MCA companies or their collections agencies will report it to credit bureaus. This can have a negative impact on both your business and personal credit. Additionally, when MCA lawsuits occur, they become part of the public record and can have severe repercussions, particularly when your background is scrutinized for purposes such as renting or buying a house, starting a new business, or various other activities. The bottom line is that the judgement cannot be concealed.
3. Securing loans in the future will be challenging.
Many individuals with a judgement believe they can simply launch a new business or disregard the judgement. Regardless of the chosen course of action, obtaining loans in the future will prove difficult. Not only will the business owner be in default with an MCA, but they will also be effectively blacklisted by MCA companies. Moreover, the judgement will resurface during underwriting and risk assessment, making it extremely arduous, if not impossible, to secure loans.
This includes acquiring loans for:
Real Estate
Cars
Business
SBA loans
Factoring
Credit Cards
4. Opening bank accounts and obtaining new credit card processing will be problematic.
Some small business owners with judgements attempt to continue operating their businesses or even start new ventures. However, when these business owners seek to open new bank accounts or engage new credit card processors, financial institutions are reluctant to engage with individuals with active judgements as they present a risk of freezes or domestication. Many credit card processors outright refuse to work with business owners who have judgements.
5. You will face ongoing harassment.
If small business owners have defaulted on MCAs, they have likely experienced harassment. Once a judgement is in place, the following will persist:
You will continue to receive calls, emails, and texts regarding your debt.
Your customers will also be contacted via calls, emails, and texts about your debt.
Your existing UCC lien will be enforced.
There may be mentions of your judgement on social media, your website, or other platforms (such as the Better Business Bureau).
What does responding to the lawsuit legally entail?
When facing a lawsuit from an MCA company, it is imperative to respond. However, it is not advisable to attempt to address the lawsuit alone. In certain states like NY, businesses are required to enlist an attorney to respond to the lawsuit.
Responding to the lawsuit prevents the MCA company from easily obtaining a judgement for collection. Instead, responding to the lawsuit indicates your intention to defend yourself and your business against receiving a judgement. Most MCA lawsuits that are responded to do not result in a judgement because clients are supported by attorneys and advisors who are knowledgeable in safeguarding the client and their business, ultimately leading to a positive resolution.
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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