Merchant Cash Advances: What Business Owners Often Overlook Until It’s Too Late

Many businesses and the merchants who own them, perceive a quick infusion of capital, as a necessity rather than an option.

For businesses whose earnings fluctuate or are seasonal, or merchants with more liabilities than assets, the idea of waiting weeks or months to obtain traditional financing becomes unrealistic.

This is the major factor and driving force for the merchant cash advance funding explosion. If you wish to understand the bottom line, think loan shark, predatory lenders preying on desperate businesses and merchants.

We want to understand the bottom line so we can better understand how these insidious loans have become so popular across the country.

The popularity of Merchant Cash Advances (MCAs) is also not sector specific. Predatory funders will finance anyone or anything that generates consistent revenue. Not net profit. Thus, you will find white collar professionals like doctors, dentists and even lawyers have fallen prey to a merchant cash advance.

The range of industry sectors is vast. Truckers, construction, roofing, restaurants, day care centers and franchises alike.

Furthermore, what makes a merchant cash advance so popular is its speed, alleged simplicity and ease of accessibility. These factors coupled with sheer desperation, leads a merchant and business to originate an MCA.

It is understandable. The merchant’s livelihood is at stake. It’s stressful, and even frightening at times. However, while the process of obtaining an MCA is swift and made to seem easy, the long-term consequences of originating an MCA are far more complicated as well as expensive.

The Growing Popularity of Merchant Cash Advances.

A Merchant Cash Advance thus fills a gap where traditional lenders fail.

Conventional financing and banks require:

• A very high credit score.
• A plethora of confusing paperwork.
• Lengthy approval process.

MCAs are able to prioritize speed, because their so-called underwriting is based strictly on a revenue-based system rather than a credit-based approval.

For a merchant with the need for immediate cash, speed is important.

How An MCA Repayment Actually Works

An MCA funder will buy a percentage of the merchants’ future receivables in exchange for a lumpsum. The business in turn pays back cash that is automatically withdrawn from their account by the MCA funder using ACH.

These ACH withdrawals can occur:

• Daily or Weekly.
• Withdrawal amounts are determined by the contract and usually not based on empirical data and mathematics.

The lumpsum received by the business is far less than the total amount it will end up paying back through ACH. An MCA funder often calls these “pulls.” The pulls are enforced by the MCA agreement and the terms and conditions are often arbitrary and punitive.

Despite these facts, MCA’s and the lenders offering these purchase of revenue agreements is growing exponentially. Bigger players are funding Billions. Think Amazon, Shopify, Stripe, Intuit and other platform-based giants.

Gone are the days when a merchant was funded by a rouge agent selling false promises out of his basement.

Where there is desperation there is often money not far behind. Predatory lenders smell this and are there to provide hard money for short term loans that are in fact and legally often a criminally usurious loan. Merely in the guise of a purchase and sale of future receivables agreement.

When Multiple Advances Enter the Picture

Businesses that are under severe fiscal distress, often choose to take out additional merchant cash advances to meet existing obligations.

This occurs when businesses do not have enough cash flow to meet business obligations. They believe a second position can help pay off the first. And soon a third and fourth position arrives and things quickly spiral out of control. It is imperative to seek legal guidance if you are stacked with multiple MCA’s. Moreover, if there has been a decline in your business’s revenue, you are entitled to obtain a true up known as a reconciliation. This is where the MCA funder is supposed to look at actual receivables that were generated and take only that revenue it is entitled to and no more. Most funders never engage in a true reconciliation. This is highly problematic from a legal perspective and again one is encouraged to seek professional advice.

There is no doubt, multiple positions or stacking will impact the long-term sustainability of any business.

Legal Complexities Around MCA Agreements

Although a true MCAs does not adhere to the legal definition of a loan, some Courts especially in NY and in Bankruptcy Courts have begun to assess whether the MCA is actually in reality a loan.

Some of the more common variables to be considered by the court when assessing this is:

• A real reconciliation clause that allows a merchant to seek the lowering of payments due to a decline in the business’s revenue.
• Whether a business is obligated to pay the MCA funder regardless of situation, even despite a decline in receivables. In reality the MCA funder assumes the risk that receivables may not generate at all.

Situations That May Lead to Litigation.

• If a payment is missed or blocked.
• There are legal issues related to the terms and conditions of the underlying agreement.
• There are issues related to enforcement of the MCA debt, including harassment.

Under these types of circumstances, a merchant cash advance lawsuit is more likely

The Role of a Merchant Cash Advance Attorney

When issues exist in a Merchant Cash Advance agreement or if certain clauses and terms are included or intentionally omitted, business owners should be able to reasonably rely on a merchant cash advance attorney to clarify the legal questions that arose from the agreement and what alternatives, if any exist?

The type of work performed by an MCA debt defence attorney may include:

• Reviewing and analysing the merchant cash advance contract.
• Assessing whether the MCA agreement can be legally enforced.
• Creating a legal strategy to take control back of the business and its revenue.

Understanding Merchant Cash Advance Defense

Merchant Cash Advance defense refers to an MCA debt defense attorney that used all legal defenses available to a merchant to dispute the underlying MCA and to engage in a recharacterization of the instrument to be a loan, not a purchase and sale of future receivables. 

A merchant cash advance debt relief lawyer will also likely:

1. Analyze the validity of the contractual terms
2. Defend against improper enforcement
3. Seek alternative solutions through the courts and or mediation or arbitration.
4. Sometimes a merchant cash advance defense lawyer will appeal a decision made by a lower Court.
5. Each MCA is unique, with a unique funder and unique numbers and facts. Thus, each case and client are unique and should be treated as such.
6. Remember MCA defense is also unique to the contractual jurisdiction i.e. what law governs the agreement.

Practical Considerations for Business Owners

As a Business Owner, what are your options or what should your approach be to dealing with an MCA?

If you are considering originating an MCA, it is important to remember:

1. Review all terms and clauses very carefully, especially the repayment method.
2. Assess the impact of ACH withdrawals on the business’s finances.
3. Consider and weigh up any pro or con in the long term.
4. Keep records of every dealing and payment you have with a funder. Demand executed copies. Keep your records up to date. This will lessen the chances of being stiffed 

Final Thoughts

Merchant Cash Advances have become a widely used funding option for fast access to capital. However, like most financial decisions, they come with trade-offs that are not always visible immediately.

Having an understanding of your rights and the laws is a must. Being able to afford daily or weekly pulls essential. Exhausting all other options including a small business administration loan (SBA).

Be fully informed. Know the numbers, including the cost of financing, the APR, the amount paid to the broker to name just a few.

In summation: If one can avoid having to take an MCA they should. This is the ideal scenario.