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A Debt Settlement Plan to Get Out of the Cash Advance Trap

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A common debt trap looks like this. A merchant borrows $30,000 from a company like Womply, or Lendini, or SBG. The stated payback is $41,400. They deduct $1,264 daily, including weekends, so the "repayment" is $8,500 per month.

The merchant deposits about $100,000 a month, net of taxes, net of COGS, net of payroll, net of everything. This is a 35% interest rate - but, with COGS and everything else, the true burden is like a 150% loan.

Most of these arrangements end up in the red zone.

Step 1: Stop Auto Debits on Every Advance

The borrower is running negative each month and living off of new advances to keep going. If you look closely at your monthly bank statement, the merchant might not realize it, but he/she is cashing out on their retirement or child's college fund just to stay afloat. If they take another $20,000 advance, with the idea they're "gonna get caught up this month," this is not enough, but it buys a little time to breathe.

But then this advance lasts less than 10 days, with the daily $900 taken out. That would leave him with no income for that period. They realize this situation is not sustainable. Many realize they're actually losing money. "What am I doing this for?" some clients say.

Most merchants start timing ACH debits, start moving money between accounts to dodge a debit, asking customers to hold a check. At this stage, you can work harder, trying to negotiate with a boss to bring in business, calling friends for financial help, telling themselves they will have to sacrifice a lot to get this company where it needs to go. If that owner is choreographing his/her bank accounts, the question is no longer whether this fails, but when, and what is left when it does.

Some debt attorneys "explain how debt settlement works" by setting a trap: they tell clients they need to "evaluate your eligibility" for some credit card hardship program. That's debt settlement in sheep's clothing. Merchants think that it is okay if they cannot settle their loans, and they can just restart auto debits if something goes wrong. But for most business loan settlements, success means stopping auto debits.

Step 2: Delay Action

When auto-debits bounce, many merchants notice two new advances on their business bank account from some other MCA companies. Others may think "my debit card is frozen so that they cannot withdraw the money" - however, the funder just makes ACH withdrawals as scheduled. Merchants learn that money in their business bank account isn't safe.

Our lawyers deal with these collectors all day long. Because they are playing defense and not offense, it almost always makes sense to delay.

Step 3: Send Letters to Stop Harassment

Collectors are particularly nasty at this stage. They have "deal breakers" for new cash advances: if your rent or payroll checks bounce, you do not want to go to court on one of those cases.

Many lawyers advise a series of delaying and stalling letters. It doesn't hurt to say you need this extra time to run financial hardship programs, which clients do want. You can send validation letters, set up free credit reports, file more validations - just don't let them speak to you.

Step 4: Develop an Exit Plan

Once the merchants regain confidence in the basic tactics, they'll continue to feel pressured with increasing threats. They need an exit plan.

One good path is to delay first. Remember, these accounts do not show up in credit reports; there is no "30, 60, 90 day" window like credit cards. For every new advance, delay paying each one longer, which builds more margin in other income streams. Debt negotiators sometimes accept longer waits.

Delaying the most dangerous debts first, with letters, gets attention. Don't just delay or duck these obligations. There must be an endgame. With large enough negotiations - several negotiated debts "nesting" into each other in the same month - settlements can be cheaper.

Step 5: Initiate Real Negotiations, After Preparing a Credible Default Argument

The majority of true debt negotiation lawyers counsel a series of settlement offers after they make an airtight case for hardship, rather than a dubious one. Negotiation is easier if collectors know about real assets - business and personal - and real, dangerous hardships. After making settlements for various accounts, depending on what type, paying settlements of maybe 80% or lower can still be fair. The harder part comes when more cash advances come in later: you're back to square one.

We try hard to do Steps 4 and 5 together. While we delay debts, with structured proofs of hardship and other correspondence, instead of using "final warning letters" - ineffective anyway, as merchants know well - there is really a future we want to negotiate. An effective business debt attorney will map all of this out, prepare negotiations as settlement leverage builds, and actually resolve several accounts in the same 60 day period. After mapping negotiations in the same general window of 6 weeks to 3 months, their success rate increases and their "package" offers carry more leverage.

What Are Your Business Debt Options?

We defend court lawsuits, summary judgment and bank enforcement actions. We negotiate with banks, lenders and collectors to find realistic debt settlement options, creditor forbearance and payment plans for business lines and loans. We advise on the practical, real-world steps business owners can take to manage bank defaults and limit personal exposure.