What Percentage Do MCAs Typically Settle For?

Why Do I Need to Hire a Lawyer If I Can Settle the Case?

If you, as a merchant, want to know if you have an obligation to pay your MCA loan in full, the answer is yes. The more accurate question is what do you have to pay if your contract with your funder can be challenged - whether as an enforceable merchant cash advance or as an unenforceable loan. Would you still owe money if your MCA is an unlawful, usurious loan? Would your debt be limited even if the agreement remains valid? Below, we explain how merchant cash advances work, how their contracts can become unenforceable, and what terms are fair for repayment.

How Merchant Cash Advances Work

When businesses sign up for a merchant cash advance, they do not actually sign up for a loan. An MCA can sound like a loan - and often shares similar characteristics - but the MCA provider "purchases" a certain amount of the business's future receivables.

The provider then collects a percentage of the business's revenues daily until it has collected a fixed total repayment amount. That total is not necessarily tied to the number of days it takes to collect. Repaying early increases the effective rate, which can carry tax implications on top of the financial strain.

Often the strain alone is enough to lead businesses into trouble. The fixed amount owed does not change, regardless of how quickly revenues get back to normal - if they ever do. Once a business defaults, its total repayment obligation is generally the same as if it had never defaulted. In fact, defaults often lead to higher obligations.

The form of the deal also invites abuse: providers misleading businesses to secure MCAs on unreasonable terms, then capitalizing on financial problems when defaults occur. This is a largely unregulated area of business, and the risk of providers going too far leads to situations where litigation is not only warranted but necessary.

What Makes an MCA Agreement Enforceable?

If a business signs a legitimate merchant cash advance agreement and then defaults, the provider is legally entitled to collect what is owed - often with penalties - unless and until the agreement is successfully challenged in court.

It is possible there are no legitimate grounds to challenge. That is the case if the provider properly drafted the agreement and did not engage in fraudulent or otherwise unlawful conduct. Businesses must then focus on negotiated settlements. Unilaterally breaching the agreement can have significant additional financial and legal ramifications.

What Makes an MCA Agreement Unenforceable?

It is entirely possible - in many cases, very likely - that there will be grounds to challenge. Many MCAs have not been appropriately drafted. Many merchants entered into them based on fraudulent and misleading representations.

What type of conduct can justify a fraud claim against a provider? Examples include:

• Advertising a loan, but drafting a merchant cash advance agreement;
• Touting lower rates, longer terms, or other deal terms than are reflected in the agreement;
• Inaccurately calculating effective interest rates and repayment terms;
• Concealing high fees; and
• Consciously neglecting to inform businesses of the material terms.

If any of these issues are at play, your agreement may be unenforceable. That would allow you to secure a more favorable negotiated settlement - or your business may be entitled to get out from under the agreement entirely.

If your business has received any form of notice from its provider, or from a debt collector or collection attorney working with it, discuss your options promptly. The risks of nonpayment increase over time. Options become unavailable once you sign a settlement agreement, especially one that includes a confession of judgment. If your business has defenses, assert them during negotiations - before signing anything.

Merchant Cash Advance Lawsuits

• Are you threatened by your MCA funder?
• Have you received a Notice of Breach?
• Did your funder declare a default?
• Did you recently sign a settlement agreement?

In a lawsuit, the focus is single: protect your money and keep your business open. Among the strategies deployed - questioning the validity of your agreement with the funder, whether the terms can withstand judicial scrutiny, whether a signed settlement limits the amount you owe in default, and whether your personal assets could be at risk. The answers should inform what and how to defend.

Don't misinterpret settlement offers. Just because a funder is willing to compromise the amount does not mean it can enforce the obligation in full. With so many lawsuits against funders for charging usurious interest and structuring agreements with impossibly low repayment ratios, many funders appear anxious to avoid litigation and the embarrassment of being investigated for business violations and fraud. A high number of deals get reached simply to avoid the loss of goodwill that comes with press coverage of being sued by former customers. Funders have recognized that a deal is often the best strategy.

Negotiating Settlements With MCA Providers

Businesses often think the terms of their merchant cash advance agreements are unchallengeable. In many scenarios, that isn't the case.

Providers recognize that legal challenges are warranted in many circumstances, and they will often engage in good-faith negotiations when an agreement can be deemed invalid or unenforceable. They don't want to end up on the wrong side of the law - and resolving these matters by mutual agreement is typically far more efficient and cost-effective than litigation.

How Much Will MCA Providers Accept in Settlements?

Providers will often accept a fraction of a merchant's contractual repayment obligations to avoid litigation they are unlikely to win. Providers that need to raise funds to keep the doors open will be highly motivated to close deals.

But what your provider will accept depends on the circumstances at hand. There is no magic formula. If your obligations aren't fully extinguishable, what is "reasonable" comes down to the overall risk versus reward you present.

One of the first steps is assessing the company's repayment obligations. If the provider fraudulently misrepresented the terms, or provided fraudulent documentation on effective rates or total repayment, that becomes leverage to get out from under the agreement entirely. When that isn't an option, the work is identifying what exactly is owed - and structuring a payment plan that ensures the provider collects no more. Offering no immediate payment while negotiating a fixed lump-sum amount can be an option, though expect to owe significantly more if you request more time.

If the provider isn't willing to negotiate, litigation follows, in federal or state court. As the litigation unfolds, negotiations can continue in parallel to see if terms can be reached that fairly resolve the outstanding obligations.

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.