Thousand of lawsuits are filed each year against small business owners who have trouble paying back the unreasonable terms of merchant cash advances (MCA). In many cases, small business owners who take on MCAs never know what hit them because one minute they are speaking with a so called "underwriter" or person from the MCA company, and then the next minute they are being sued in a foreign state or have their assets frozen through the UCC. This article provides some of the things that small business owners should expect to see (what we call the MCA playbook) when they begin to or are having a hard time with their Merchant Cash Advances.
By Thomas Tramaglini, Chief Operations Officer
Because Merchant Cash Advances are not loans, their playbook for dealing with defaults is different.
Merchant cash advances (MCA) are not loans. Loans come from an industry that is regulated by the Federal Government for which rules exist on what lenders can and cannot do to its clients who default. MCAs are advances of future receivables or transactions where MCA companies purchase future sales from small businesses for a massive discount, imposing harsh terms on the business owner and unregulated systems around recovering funds from the client if they default.
Many MCA companies and their collections agencies can be relentless, nasty, and unreasonable. The ironic thing about MCA companies is that they benefit from the lack of regulation but when their clients default, they use the courts and law to go after small business owners.
You have a real hardship. The MCA company does not care.
The MCA companies have heard many stories and excuses for why small business owners had a hard time paying or defaulted on their advances. The bottom line is that the MCA company and their investors are used to getting paid back fast and at a large profit. When you do not make payment, the MCA company will go after you regardless. They will move to freeze assets, garnish your wages, and make your life miserable. To these people who are predatory in nature, they work to take advantage of you when they fund you by giving you a "good deal" at 50% discount (which is their take) and when you are not able to pay they will become ruthless.
The MCA company and their attorney/collections firms will look to apply max pressure to you so you cave in.
When you have a hard time with your MCA, the MCA companies will look to put massive amounts of pressure on you until you either restart the program you could not afford, make a new settlement, or the MCA company can get a judgement in court against you so they can begin domestication processes in your own state to begin taking your assets and liquidating what they can to get their money.
You, your family and friends, your customers, and your vendors will be harassed.
One of the ways that the MCA companies will begin to put pressure on you is that they will relentlessly harass you, your family, friends, customers, vendors, and anyone they can get to so you cave in.
According to pretty much every MCA agreement that is signed, you give them permission to harass you and all of the parties we listed above, as well as permission to file a UCC lien against you, meaning they can tell your customers that you are not to get paid, as well as your vendors not to supply you. Technically, once the MCA company has filed a UCC lien against you the harassment will get more intense. In some cases, you may be threatened. This can be scary and totally seem inappropriate.
UCC Liens
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.
Many times, the MCA company has filed a UCC lien against the small business owner and if someone has had a hard time paying back their MCA or stopped paying, they can expect that a UCC lien has been filed. This is something that many small business owners cannot get ahead of so if you are getting sued, use our tool to see if you have a UCC filed against you and contact us to learn what to do.
How can UCC liens affect your business?
UCC liens identify to others that you have a security interest lien.
Prevents additional borrowing.
Negative credit on your business credit
Assets that are pledged for recovery.
Civil Lawsuit
Besides having a UCC lien filed, the MCA companies will file lawsuits against the small business owner. When this happens the MCA company hopes to get the small business owner to settle or begin a payment plan immediately to stop the lawsuit. However, the MCA company also hopes that the small business owner does not answer the lawsuit. In states like New York, where the chart below shows how many lawsuits were filed each month of this year, over 90% of the lawsuits are never answered (defended) and in most cases the MCA company's attorney can get the clerk of the court (not the judge) to sign a judgement, which means that the MCA company can go after you and your assets, regardless of where you are. More information can be found here.
Data for chart comes from New York from January through June 2023 and has 99.3% reliability
MCA Companies hedge you are going to either be or play dumb.
When the MCA company begins to go after you for their funds, they assume that the small business owner will ignore them. That is when they file UCC liens and lawsuits against the client. Before you know it your incoming revenue can be frozen and the MCA company is going to legally go after the frozen funds that are frozen.
The MCA company also in many cases does not have to serve you with a lawsuit because in their agreement you signed they have listed they can mail or email the lawsuit to you.
The bottom line is that you should absolutely deal with your MCA debt and deal with it before its too late.
Judgements to Domestication
Once you have a judgement from an MCA company, the MCA company will begin to find and seize your assets until your debt is collected. What assets can MCA companies seize? This can include cars, secondary real estate, jewelry and personal items, funds frozen through UCC, as well as funds in bank accounts etc.
If you are not located in the state where you have the judgement, states have domestication procedures in place where judgements can be brought to the business owners state and they can begin collecting. If the business owner tries to hide assets, the domestication attorneys for the MCA company can file discovery motions which require the business owner to disclose 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.
The MCA company will file a lawsuit in a state that is favorable to them, not you.
Many times, we hear the client tell us that they have an attorney. Remember, anyone getting sued must retain an attorney to defend themselves who is admitted to practice law in the State where the lawsuit was filed. That is, if the lawsuit is in New York, you cannot use an attorney from Texas unless they are admitted to practice law in New York (State).
Companies like ours have attorneys for this work and it is highly that you utilize one of our attorneys through one of our programs. Our attorneys are experienced in MCA law and know exactly how to handle any situation.
MCA companies hope you will try to answer the lawsuit by yourself.
Most states require business owners to answer lawsuits using an attorney. There are self-answer lawsuit software solutions out there which you can use at a low cost but beware. Some states will not allow small business owners to self-answer lawsuits and most times when someone decides to answer a lawsuit by themselves, it turns into a judgement.
MCA companies hope you will work out your debt with their attorney or collections firm.
Once you are either sued or have a UCC lien against you, you need help. Those who decide to work directly with the MCA company can absolutely work out their settlement and help themselves. The issue with this is that those who do this have been sued, therefore they are at a disadvantage against an MCA lender and attorney and if something goes wrong before the payback is finished, it can be significantly harsher in the long run. Further, settlement companies and attorneys are educated and experienced in working with MCA companies and attorneys/collections firms and results are usually much better.
It is not suggested that anyone settle with an MCA company or their law firm on their own without consulting or retaining an attorney first or a reputable settlement company.
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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