Criminal Defense Lawyers

Alaska Merchant Cash Advance Attorney

Alaska Merchant Cash Advance Attorney

Merchant cash advances have become a popular alternative financing option for small businesses in Alaska. However, these advances come with some major risks that business owners should understand before signing on the dotted line. This article provides an overview of merchant cash advances in Alaska, including how they work, their pros and cons, and when you may need to contact an attorney for help.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a form of financing where a company provides a business with an upfront sum of cash in exchange for a percentage of future credit card and/or debit card sales. It is not technically considered a loan under Alaska law, so MCA companies can bypass state usury caps on interest rates.Here’s a quick rundown of how merchant cash advances work:

• You receive a lump sum payment upfront, which is typically some percentage of your annual credit card sales. This could range from $5,000 to over $500,000 depending on the size of your business.
• Instead of making fixed monthly payments like a traditional bank loan, you repay the advance through daily or weekly deductions from your credit card sales. The deductions are taken automatically via ACH payments.
• The total amount you end up repaying is determined by the “factor rate,” which is usually 1.2 to 1.5 times the original cash advance amount. So if you get a $100,000 advance with a factor rate of 1.4, you would repay $140,000.
• Repayment periods are very short, often 3-18 months. This means deductions from your daily/weekly credit card sales to repay the MCA can be quite high.
• There is no set repayment schedule. The lender takes repayments directly from your credit card receipts until the full amount has been collected.
• If your credit card sales drop for any reason, your repayment amounts drop as well. However, this means the repayment period gets extended.
• MCAs are based on card receipts, not profit. So even if your business is losing money, the repayments still have to be made.
• Defaulting on repayment can allow the MCA company to take more aggressive collection actions. Some may be able to confess judgment against your business or freeze bank accounts.

Pros of Merchant Cash Advances

There are some potential benefits that make merchant cash advances appealing for small businesses:

• Fast funding – You can get approved for an MCA very quickly, sometimes in as little as 24-48 hours. The application process is simple and funding is provided upfront in one lump sum.
• Flexible repayments – Repayments fluctuate based on your credit card sales volumes. If you have a slow month, your repayment amount for that month decreases.
• No collateral required – MCAs do not require any business assets or personal guarantees as collateral. This makes them more accessible to newer businesses.
• Use funds for any purpose – MCA companies do not place restrictions on how you can use the cash injection. It’s up to you how to best utilize it to grow your business.
• Alternative to high-interest loans – For businesses that do not qualify for bank loans, MCAs can provide much-needed working capital, albeit at a higher cost.
• Predictable deductions – Some businesses prefer the predictability of fixed daily/weekly deductions instead of a large monthly loan payment.

Cons of Merchant Cash Advances

While MCAs offer some advantages, there are also many downsides to be aware of:

• Extremely high cost – The equivalent APR on an MCA is typically between 60% to 300%. This is vastly higher than even credit cards or online small business loans.
• Repayments take priority – MCA payments get deducted from credit card sales before you receive the remaining proceeds. This can greatly reduce working capital.
• Vulnerable to slow seasons – Seasonal dips in revenue may extend your repayment period by months. Slow periods can be devastating with MCA repayments eating 30-40% of card receipts.
• Debt traps – It’s very easy to get stuck in a cycle of taking new MCAs to repay existing ones. As balances balloon, more of your card receipts go toward fees instead of operating costs.
• Aggressive collections – MCA lenders can confess judgment against your business if you default, allowing them to seize assets or freeze bank accounts without notice.
• Obscure contract terms – MCA agreements contain complex verbiage that many business owners do not fully grasp. Make sure you understand all terms before signing.
• Difficult to compare offers – Unlike loans, there is no standard way to compare MCA costs across different providers. You have to analyze the factor rate, fees, deductions, and all other fine print.
• No interest tax deductions – Because MCAs technically are not loans, you cannot deduct interest payments from your taxes.

As you can see, the risks and downsides of merchant cash advances often outweigh the quick access to capital they provide. Before obtaining an MCA, be sure you thoroughly understand the terms and have a plan to repay it quickly.

When to Contact a Merchant Cash Advance Attorney

If you currently have an MCA or are considering one, it’s a good idea to consult with an attorney experienced in this area of finance. Here are some common situations where legal help can prove invaluable:

• Reviewing the MCA agreement – Have an attorney examine the full MCA contract to identify any problematic clauses or terms that could allow the lender to take advantage of you. They can also ensure you fully understand all fees, deductions, and other details.
• Structuring the MCA strategically – An attorney can provide tips on negotiating favorable repayment terms and minimizing the overall cost. They can model different offers to see which provides the most working capital while being realistically repayable.
• Disputing abusive collection practices – If an MCA lender engages in unethical or illegal collections, an attorney can forcefully defend your business against it. They may be able to invalidate the MCA agreement altogether if it contained unlawful terms.
• Defending confession of judgment – Your attorney can fight back if the MCA lender tries to confess judgment against your business without proper notice. In some cases, the judgment may be voidable.
• Debt restructuring – If you are struggling to make MCA payments, an attorney may be able to negotiate alternate repayment terms or a settlement. In some hardships, part of the balance can potentially be forgiven.
• Lawsuits and arbitration – Should a dispute arise where the MCA company sues you, legal representation is critical to build a strong defense. An experienced attorney knows what counterclaims can be raised to invalidate the MCA contract.
• Bankruptcy – Filing for bankruptcy may be an option to discharge part or all of an unaffordable MCA balance. An attorney can advise if this path is appropriate.
• Closure assistance – If the financial distress from an MCA ultimately forces you to close your business, an attorney can ensure this process goes smoothly and legally.

Having an knowledgeable lawyer on your side can help minimize legal and financial risks when dealing with a merchant cash advance. Don’t hesitate to call one at the first sign of trouble.