The Deduction That Arrives Before the Deposit
The daily ACH withdrawal does not wait for the business to have a good day. It arrives with the regularity of a utility bill, except that a utility bill does not increase in effective burden when revenue declines. The MCA withdrawal does. A fixed daily deduction of $800 represents a different share of gross revenue on a day the business deposits $4,000 than on a day it deposits $1,200. The contract does not distinguish between these days. The deduction is the same. The pressure is not.
Business owners describe the experience in remarkably consistent terms. The first month feels manageable. The daily amount was calculated against an average, and averages obscure variance. By the second or third month, the rhythm of the deduction has begun to reshape how the business operates. Purchases are timed around the withdrawal. Payroll is structured to avoid the days when the ACH hits and the account balance drops below what suppliers require. The business begins to organize itself around the deduction rather than around its own operations.
In six of the last eight cases we handled involving daily ACH withdrawals, the merchant’s average daily bank balance fell below $500 within ninety days of the MCA origination. In two of those cases, the account had been overdrawn repeatedly, triggering bank fees that compounded the cash flow problem the MCA was ostensibly meant to solve.
The Compounding Architecture of Extraction
The ACH structure creates a particular form of financial erosion. Because the deduction is fixed and daily, it functions as a senior claim on the business’s revenue. Before the owner can allocate funds to rent, payroll, inventory, or any other obligation, the MCA funder has already collected its share. The business operates on the remainder. And when the remainder is insufficient, the business seeks additional capital.
This is the entry point for stacking. A second MCA is taken to cover the shortfall created by the first. The second funder’s ACH withdrawal joins the first. The combined daily deduction now consumes a larger share of revenue, which accelerates the decline, which creates the conditions for a third advance. I have reviewed files where four or five funders were withdrawing simultaneously from the same account, each on its own schedule, each indifferent to the others’ claims.
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The account does not empty all at once. It empties in increments, every morning, before the business opens.
The legal question embedded in this structure is whether the fixed daily withdrawal constitutes a repayment obligation inconsistent with the purchase-of-receivables characterization. If the contract says the funder is purchasing a percentage of future revenue but the actual collection is a fixed dollar amount unrelated to daily revenue, the reconciliation provision may be illusory. And an illusory reconciliation provision is one of the factors courts examine when determining whether an MCA is, in substance, a loan.
The practical question is simpler: whether the business can survive the extraction rate. The answer is not always yes, and it is not always no. But determining where the business sits on that spectrum, and what legal tools are available to alter it, requires a conversation that begins with the specific numbers. We are available for that conversation.
For more on this topic, see How to Revoke ACH Authorization from an MCA Funder.
A merchant cash advance company has filed a confession of judgment against your business and frozen your bank account.
What are your options when an MCA company seizes your assets?
Confessions of judgment are banned in many states and can be challenged in court. An attorney can file an emergency motion to unfreeze your accounts and challenge the validity of the COJ. Many MCA agreements contain unenforceable terms.
This is general information only. Contact us for advice specific to your situation.
For more on this topic, see Should You Stop ACH Payments to Your MCA Company?.
