When a client defaults, Merchant Cash Advance (MCA) companies use various methods to attempt to recover their funds. Specifically, one method is through the courts by filing a lawsuit against the small business owner. Using data we collected over a 7 year span, we found that over 92% of small business owners never answer their MCA lawsuits. Most cases ultimately resulted in a judgement (a court decision in the lawsuit) against the small business and its owner(s). Once a small business and its owners have a judgement against them, the MCA company can begin to seize assets of the small business owner in attempt to recover their funds. In this article we hope to educate small business owners by outlining what a MCA judgment actually is and what can happen if you receive one.
By Thomas Tramaglini, Chief Operations Officer
Default on a Merchant Cash Advance? Expect to get sued.
Each year, thousands of small businesses are sued by Merchant Cash Advance companies for defaulting on their advances. Using data we collected over a 7 year period, we found that approximately 1,100 lawsuits are filed each month by Merchant Cash Advance companies in the State of New York (New York State Court System). We also found that an additional 521 MCA lawsuits were filed (on average) in other states during the same period (Unicourt).
Why do MCA companies choose to sue small business owners?
When a small business defaults on a Merchant Cash Advance (MCA), MCA companies have several tools that they use to try to recover funds they have sent to small business via Merchant Cash Advances. One such tool is that they sue the small business owner. From the lawsuit filed, a few things usually can occur:
It forces the small business owner to make their payments; usually those payments are not affordable or attainable.
Small business owners are forced to file bankruptcy.
And, more prevalent is the small business owner does not retain an attorney and does not answer the lawsuit resulting in a judgement.
9 in 10 Small Business Owners Do Not Answer Their Lawsuit. Most Result in a Judgement.
Most of the MCA companies choose to sue both the small business and the owner personally to recover funds which they have lost. According to the data, nearly 91% of all small business owners do not retain an attorney to answer and fight such civil actions resulting in a judgement. Judgements can be very damaging, ultimately hurting business
owners and their business for many years.
What is an MCA Judgment?
A judgement is nothing more than a court order that is a decision in a lawsuit. If you do not answer your lawsuit, you can and will easily receive a judgement allowing the MCA company to begin garnishing your funds, seizing your assets, or liquidating your equipment. And MCA companies traditionally file lawsuits in venues that are not the home state of the business owner (meaning they must retain an attorney in the venue that the lawsuit is filed which is not always easy) because the laws in those states are generally friendly to the MCA companies. For instance, most MCA lawsuits are filed in places like New York because the laws there are favorable to the MCA companies.
For instance, in New York, after 30 days pass following the service of a lawsuit to an out of state business owner a clerk from a law firm can go down to the court and have a clerk (not a judge) sign an order for a judgement without notice. Unless a small business owner retains an attorney, failing to answer the lawsuit will result in a judgment and MCA companies can begin going after a small business owners’ business and personal assets.
I will just file bankruptcy if I get a judgement....
This is something we consistently hear from clients who do not want to retain an attorney or do not want to deal with an MCA company.
So, if you decide to file bankruptcy, here are some things to consider:
If you file bankruptcy, most will need to file both business bankruptcy and personal bankruptcy.
Bankruptcy may relieve your debt, but it does not vacate judgements.
Depending on your state, judgements last 5 to 20 years. So, while you may think you are relieving your debt, you will still have to deal with having a judgement on your record.
This means:
The judgement will still show up on both your personal and business credit.
You will still have a hard time borrowing money. This includes if you want to start a new business.
The MCA company (in some cases) may still be able to collect funds after the fact.
So...Judgements - Bad.
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 advise. 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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