Small business owners who cannot secure bank funding (most business owners) turn to Merchant Cash Advances (MCA) and small business loans for fast funding. And when the small business owners’ default on their MCA(s), they become aware of the dirty game of having their funds collected by the MCA company or their collections companies. In this article, we explore the legality of such actions and what extent MCA companies may go to in their collection efforts.
By Thomas Tramaglini, Chief Operations Officer
When someone defaults on a Merchant Cash Advance (MCA) company, MCA companies use several tactics which are intended to recover the funds that they are owed by the small business owner. These tactics or actions can destroy your business and, in some cases, more than that. However, while small business owners are appalled at what MCA companies do when they default, most small business owners are unaware that they have already provided permission to the MCA companies to wreak havoc on their businesses and their lives.
From the MCA company’s perspective: You defaulted.
Look – if you are a small business owner, you sold future receivables to the MCA company and you did not pay them back. The bottom line is that the MCA company is not going to just move on without acting.
MCA companies for the most part do not use massive bank lines to funds MCAs. Instead, the MCA companies depend on investors (syndication) to provide the funds for MCA companies. Investors may be involved in the selection of what small businesses their funds go to, or they may have a manager who might handle the syndication.
However, when a small business owner defaults on their merchant cash advance it affects the merchant cash advance company in a bunch of ways. For one, the MCA company just lost their investors’ funds, which can cause investors to not want to invest anymore. Also, MCA companies are used to getting paid back fast with a 30%+ profit. And when MCA companies do not get paid back, most MCA companies act.
Tactics that MCA companies use against small business owners.
You Have Given Permission for MCA Companies to Come After You and Your Business
Before you take funds, MCA companies systematically prepare for you to default. And while they hope you do not default, when you do, you should be aware that you have already given permission for the MCA companies to go after you.
How can you find out?
Take a look at your MCA agreement: In nearly every agreement permission is given to MCA companies to use a range of tactics from contacting your clients, filing UCC liens against you, personally guaranteeing funds, and freezing your bank accounts and credit card processor.
One of the larger MCA companies, Delta Bridge funding has a platform called Cloudfund. This platform has standard language which we will provide giving a pretty standard flavor of what small business owners allow:
26. Remedies. If any Event of Default occurs, Buyer may proceed to protect and enforce its rights including, but not limited to, the following:
a. The Specified Percentage shall equal 100%. The full undelivered Purchased Amount plus all fees and charges (including legal fees) assessed under this Agreement will become due and payable in full immediately.
b. The Remittance Amount shall equal 100% of all Future Receipts.
c. Buyer may enforce the provisions of any Guaranty against each Guarantor.
d. Seller shall pay to Buyer all reasonable costs associated with the Event of Default. Buyer may proceed to protect and enforce its rights and remedies by arbitration or lawsuit. In any such arbitration or lawsuit, under which Buyer shall recover Judgment against Seller, Seller shall be liable for all of Buyer’s costs, including but not limited to all reasonable attorneys’ fees and court costs. However, the rights of Buyer under this provision shall be limited as provided in the arbitration provision set forth on arbitration below.
e. This Agreement shall be deemed Seller’s Assignment of Seller’s Lease of Seller’s business premises to Buyer. Upon an Event of Default, Buyer may exercise its rights under this Assignment of Lease without prior notice to Seller.
f. Buyer may debit Seller’s depository accounts wherever situated by means of ACH debit or facsimile signature on a computer-generated check drawn on any of Seller’s bank accounts for all sums due to Buyer.
g. Subject to arbitration as provided in Section 44 of this Agreement, all rights, powers and remedies of Buyer in connection with this Agreement may be exercised at any time by Buyer after the occurrence of an Event of Default, are
cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.
27. Remedies are not Exclusive. All rights, powers and remedies of Buyer in connection with this Agreement set forth herein may be exercised at any time after the occurrence of any Event of Default, are cumulative and not exclusive and shall be in addition to any other rights, powers or remedies provided to Buyer by law or equity.
28. Power of Attorney. Seller irrevocably appoints Buyer and its representatives as its agents and attorneys-in-fact with full authority to take any action or execute any instrument or document to do the following: (A) to settle all obligations due to Buyer from any credit card processor and/or account debtor(s) of Seller; (B) upon occurrence of an Event of Default to perform any and all obligations of Seller under this Agreement, including without limitation (i) to obtain required insurance; (ii) to collect monies due or to become due under or in respect of any of the Collateral; (iii) to receive, endorse and collect any checks, notes, drafts, instruments, documents or chattel paper in connection with clause (i) or clause (ii) above; (iv) to sign Seller’s name on any invoice, bill of lading, or assignment directing customers or account debtors, as that term is defined by Article 9 of the UCC (“Account Debtors”), to make payment directly to Buyer (including providing information necessary to identify Seller); and (v) to file any claims or take any action or institute any proceeding which Buyer may deem necessary for the collection of any of the undelivered Purchased Amount, or otherwise to enforce its rights with respect to collection of the Purchased Amount.
ADDITIONAL TERMS
29. Financial Condition. Seller and its Guarantor(s) authorize Buyer and its agents to investigate their financial status and history, and will provide to Buyer any bank or financial statements, tax returns, etc., as Buyer deems necessary prior to or at any time after execution of this Agreement. A photocopy of this authorization will be deemed as acceptable for release of financial information. Buyer Seller hereby authorizes Buyer to receive from time to time updates on such information and financial status.
30. Transactional History. Seller shall execute written authorization(s) to their bank(s) to provide Buyer with Seller’s banking and/or credit-card processing history.
31. Indemnification. Seller and its Guarantor(s) jointly and severally, indemnify and hold harmless to the fullest extent permitted by law Approved Processor, any ACH processor, customer and/or Account Debtors of the Seller, its/their officers, directors and shareholders against all losses, damages, claims, liabilities and expenses (including reasonable attorney’s fees) incurred by any ACH processor, customer and/or Account Debtors of the Seller resulting from (a) claims asserted by Buyer for monies owed to Buyer from Seller and (b) actions taken by any ACH processor, customer and/or Account Debtor of the Seller in reliance upon information or instructions provided by Buyer.
Basically, the section above grants the MCA company the ability to collect funds from small business owners who do not make good on their agreements to pay the MCA company for what they have purchased.
What plays do most MCA companies have in their playbooks?
Harassment
One of the most prevalent things that MCA companies do is harass until they get repaid. The MCA companies will stop at nothing until they do so. Using their agreements and specifically the Uniform Commercial Code, MCA companies will send letters, call, e-mail, and text the family members, clients and Customers, account payers (Insurance companies, factoring companies), friends, children, parents, and anyone they can contact to harass you, so you pay.
Is it legal? Yes, it is. If the MCA company has in their signed agreement that they can do so, and they all do, it’s totally legal.
UCC
The Uniform Commercial Code (UCC) is a group of laws that relate to commercial transactions that are accepted by all states in the United States. UCC filings are used by lenders and Merchant Cash Advance companies to announce their rights to collateral or liens on a loan or tangible property.
And a UCC filing, or lien are used by lenders and MCA companies to announce their rights to collateral, liens, or a secured interest. In the context of a Merchant Cash Advance, MCA companies will secure your receivables as a form of collateral using the Universal Commercial Code.
1. UCC liens against specific collateral:
This type of lien gives creditors an interest in one or more specific, identified assets rather than an interest in all the assets owned by a business. These are most often used for inventory financing or equipment financing transactions.
2. UCC blanket liens:
This type of lien gives a creditor a security interest in all of the borrower's assets. It’s commonly used for loans from banks and alternative lenders, as well as loans guaranteed by the Small Business Administration (SBA). Lenders prefer blanket liens because they’re secured by multiple assets and are, therefore, less risky. In some cases, a blanket lien might carve out some assets that will be exempt from the lien. This might occur if the remaining assets are more than sufficient to reimburse the lender, should a default occur.
Lawsuits
When MCA companies are attempting to collect their funds, they will commonly file a civil suit in a place that is friendly to their cause. Most of the time, that is in New York. New York has some of the friendliest laws in the nation when it comes to MCA fund recovery.
We have written extensively about this point. You can read more here about why MCA companies sue in states like New York.
In short, the laws in New York make it easy for MCA companies to get a judgement against a small business owner and business. Failure to respond to the lawsuit in the allotted time (over 90% of small business owners never respond) means that the MCA company only needs to get the court clerk to sign off on the judgement. Once you have a judgement against you, it can be quite painful and the ramifications are awful.
The lawsuits that MCA companies file typically go after the business and the business owner personally.
99% of All MCA Companies Go After You and Your Business Too. We speak to many small business owners and a typical response is that they will file for bankruptcy, or they will just close the business.
Take note that MCA companies will sue small businesses and their owners personally too.
This means that if a small business owner does not answer the lawsuit, or at least work out some sort of payment plan with the MCA company, the small business owner can receive a judgement against him or her personally. A personal judgement will come up if the small business owner attempts to borrow money, purchase real estate, and many other instances.
I am or I was sued and what do I do?
First, you should be aware of what is going on, what can happen, and what you need to do. Speaking to an experienced advisor of Beacon Client Solutions can be the start you need. You may or may not choose to retain our firm to assist you but rest assured, you will receive professional and accurate information from any member of our team.
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 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 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.