According to the Securities and Exchange Commission (SEC), an estimated 50% of all small business owners who take on Merchant Cash Advances (MCA) cannot pay back the terms or payments which are required and eventually default. When MCA defaults occur, MCA companies and their attorneys turn to their playbooks which usually includes a lawsuit against the small business owner and the small business. Failing to deal with the lawsuit can result in a judgement, which basically is a court ordered judgement for the MCA company which allows the MCA company to begin garnishing your funds, seizing your assets, or liquidating your equipment. Furthermore, judgements are not only against your business, but they are against you personally which in itself can be harmful. In this article we lay out several meaningful reasons for why someone does not want a judgement and what small business owners can do to combat the MCA companies.
By Thomas Tramaglini, Chief Operations Officer thomas@beaconclientsolutions.com
Most small business owners who default on Merchant Cash Advances get sued and do not answer their lawsuits resulting in a judgement.
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). 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. Other states like Florida only give you 20 days to answer your MCA lawsuit.
5 Reasons Why You Do Not Want A Judgement
1. The MCA companies will collect from your assets and more.
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.
2. Your Business and Personal Credit will be affected.
Once you have a judgement, most MCA companies or their collections firms will report the judgement to the credit bureaus. This can be a negative impact on your business and certainly your personal credit. Furthermore, when MCA lawsuits occur the cases are entered into the public record and the impact can be detrimental, especially when your background is searched when trying to rent or buy a house, open a new business, or numerous other things. The bottom line is that you will not be able to hide the judgement.
3. You will have a hard time borrowing money in the future.
Many people who have a judgement think that they can just start a new business or ignore the judgment. Regardless of the action one takes, they will have difficulty borrowing money in the future. Not only is the business owner defaulted on an MCA, they are certainly blacklisted by MCA companies. However, the judgement will come back on underwriting and risk management hence, making it very hard to borrow money (if not impossible).
This includes borrowing money for:
Real Estate
Cars
Business
SBA loans
Factoring
Credit Cards
4. You will struggle to open bank accounts and secure new credit card processing.
Some small business owners who have judgements will try to continue to operate their businesses and in some cases try to start a new business. When the business owner begins to open new bank accounts or procure new credit card processors these financial institutions will not want to deal with business owners who have active judgements as they pose a threat for freezes or domestication. Many credit card processors will not deal with business owners who have judgements period.
5. You will continue to be harassed.
If small business owners have defaulted on MCAs, they have likely been harassed. Regardless of the MCA company, once you have a judgement the following will continue to happen:
You will continue to be called, emailed, and texted about your debt.
Your customers will continue continue to be called, emailed, and texted about your debt.
Your existing UCC lien will be enforced.
You may have postings about your judgement on social media, your website, or other websites (Better Business Bureau, etc.).
What does legally responding to the lawsuit do?
When you get sued by an MCA company, you need to respond. (We also have several posts on what to expect and what to do).
However, do not attempt to answer the lawsuit by yourself. Some states like NY require businesses to use an attorney to answer your lawsuit.
Answering the lawsuit avoids the MCA company being able to get a judgement which makes collection super easy. Instead, answering the lawsuit puts down your intent to defend yourself and your business from getting a judgement. Most MCA lawsuits that are answered never get a judgement because clients are able to be supported by attorneys and our advisors who know how to protect the client and their businesses, ultimately reaching a favorable outcome.
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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