5 Mistakes Business Owners Make After Missing Their First MCA Payment

Failing to Respond to the Merchant Cash Advance Company

When facing financial hardship, business owners, especially those with limited legal experience or no experience with merchant cash advances, take the approach of simply ignoring any correspondence they receive from the MCA funders. This can be disastrous. Even when the communication does not threaten legal action it could represent a significant financial opportunity.

MCA companies are in business to make a profit. From their perspective, it is generally in their best interests to receive what funds they can from business owners as quickly and cost-effectively as possible. Once an MCA funder finds that it is difficult or impossible to secure funds from a business, it may look to pursue a court judgment or seek legal recourse through alternative means. By not responding to a funding company and missing merchant cash advance payments, a business owner could quickly find themselves being named as a defendant in a breach of contract lawsuit, subject to collection efforts by multiple funders at once, or be accused of violating state or federal regulations.

MCA funding contracts may also include so-called "confession of judgment" clauses which allows the MCA lender to go to a court and secure a judgment against you without a trial and even though the claim that they have may be highly disputed. Once the court issues the judgment, the MCA lender can take steps to secure funds from the merchant's bank account that are needed to cover the debt. Merchant cash advance clients that avoid contact with the MCA funder may not have the opportunity to contest the facts as they are presented to the court in the petition for judgment.

You should not make any definitive decisions as to whether or how to contact the funder before you seek legal counsel.

Not Knowing the Actual Status of MCA Accounts

One of the primary reasons why business owners fall behind in making their debt repayments is that they simply do not know what money is owed to whom, by whom, and by how much. The failure to track all relevant data and financial transactions could leave the business exposed to one or more lawsuits and additional expenses.

In an ideal world, every small business owner would have an entire team of accountants and attorneys to monitor every account and transaction. The reality is that most small business owners may not have the resources to afford such a service. For many businesses, the first time they become aware of potential legal issues is when a collection notice from the MCA company comes in the mail.

Taking Out Additional Advances (Or Applying for New Advances)

Small business owners facing financial challenges often rely on cash advances to keep their operations afloat. However, using new cash advances to repay older merchant cash advances is a risky strategy that could do more harm than good.

MCA debt is notoriously expensive, with interest rates typically ranging from 20% to 250%. While these advances are easy to obtain, the daily or weekly repayment amounts can quickly add up and overwhelm a business owner's finances. Taking out new advances to pay off previous advances can lead to an even greater accumulation of debt and make it more difficult for the business owner to ever pay off their debt.

Applying for multiple cash advances in a short period can signal to potential funders that the business is experiencing financial difficulties, which could impact the business's reputation and reduce its access to funding in the future. Business owners must be careful not to misrepresent their financial situation.

Before taking out a new cash advance, business owners should seek the advice of a knowledgeable attorney or accountant to determine whether this is the right decision for their business.

Prioritizing One MCA Funder Over Another (Or New Funders)

It can be incredibly difficult for a small business to obtain financial assistance from traditional sources like banks or institutional investors in today's credit environment. Many business owners look to companies that are known as alternative lending companies.

There are some MCA funders who will contact you to offer an advance even though you already have an account with their company. They are essentially acting as salespeople, soliciting additional business. In this situation, the first thing that we would suggest you do is contact your current MCA funder to find out whether or not there are any terms and conditions associated with these offers and to confirm what funds you are able to access.

As a rule of thumb, you should avoid entering into multiple contracts with different MCA funding companies for the purpose of repaying past-due MCA loans or advances.

If you believe that a particular funder is being less than honest or if you think they are not working in good faith, you may have a legal case for fraud, false representation, or deceptive trade practices. If this is the case, consult an experienced business litigation attorney to review your situation in its entirety and discuss any options you have.

Trying to Resolve Their MCA Debt On Their Own

Trying to settle outstanding debt by applying for additional funding with an MCA funder may put the merchant in an even more precarious financial position. In most cases, this situation can be avoided if the business owner seeks legal counsel and advice.

An experienced business litigation attorney can advise you on the terms of the proposed merchant cash advance agreements and will discuss whether they represent an appropriate option for the business's situation. In addition, the attorney may negotiate an acceptable resolution to your debts with your current or prospective merchant cash advance company and will guide you through any proceedings involving breach of contract claims or judgment debt.

If you own a small business and the business's finances are not in good shape, it may be necessary to approach the funder and negotiate a reduction in the amount of payment obligations that are currently outstanding. The terms of any renegotiation should be negotiated with care and only with the assistance of an attorney.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.