The Hidden Danger of Stacking Merchant Cash Advances

By their very nature, merchant cash advances (MCAs) put their recipients under extreme financial strain. The advance has to be repaid out of your business' daily revenues, which severely limits your ability to deal with daily expenses, invest in new equipment, or pursue potential business deals.

Stacking takes things to another level.

Stacking arises when a small business takes out another MCA while one is already in effect. Suddenly two MCAs are putting stress on your revenues, and two lenders are demanding repayment from them. The resulting strain is often far greater than either lender appreciates. All too often, stacking puts your company in a far worse position than before you accepted the MCAs in the first place.

That strain leads to conflict. Not only will you be stretched to the breaking point to repay both advances - the lenders often begin to compete with each other for priority access to your revenues.

By this point, it is often too late. Without legal help, it is impossible to extricate your business from the mess.

How Stacking Works

Stacking can happen in one of two ways:

• The more common scenario: a small business applies for an additional cash advance, often out of desperation.
• You can also be a victim of stacking when a rogue lender funnels another advance into your account, often without your approval or awareness.

Lenders are often eager to supply cash advances to struggling companies, and that competition compels them to offer advances in haste.

Each advance is intended to receive a certain percentage of your daily revenues. Two advances means double that amount is expected, even as your business' situation remains the same. As the lenders fight amongst each other, the funds going toward each advance generally get cut, leaving you in default on both - or the entire daily withdrawal goes to one MCA, leaving you out of compliance on the other. Either way, you end up in breach of a contractual duty and facing the threat of collections, possibly for both MCAs at once.

To make matters worse, the damage often comes after one or both lenders invokes an acceleration clause, demanding the entire advance amount at once.

An illustration of how these circumstances spiral: a criminal case in Florida, where the Attorney General prosecuted three MCA lending companies for violations of state usury laws. The case involved at least a dozen stacked loans, but prosecutors chose to pursue only one. Meanwhile, the business owner defaulted and got sent to collections for the eleven other advances he had accepted.

How Stacking Happens

Some causes are within your control. Others can be completely outside your knowledge.

On the side of your own culpability: your company faces the strain of repaying the original MCA, and you take out another in an attempt to cope. Small businesses commonly take out a second MCA to keep up with daily operational expenses. The problem is that the second advance is subject to a separate daily repayment - and every lender is contractually obligated to collect from your business, often leading to huge issues with priority access.

A few unscrupulous lenders will stack MCAs on your business without your permission or even knowledge. Either independently or in cahoots with an ISO, they collect sensitive business information like your:

• Tax identification number
• Federal Employer Identification Number (FEIN)
• Social Security Number (SSN)
• Financial statements

They then draft and sign a contract that, from afar, seems to be between you and them. They forge the signature, open a bank account in your business' name, and draft dummy checks to that account from their personal accounts to give the appearance of your consent. They send you an amount of cash as if it were a merchant cash advance, keep the remainder for themselves as interest, and list your company as the legal contact on file for the new loan. Suddenly you are subject to legal obligations on a loan you neither requested nor received.

Unraveling Merchant Cash Advance Stacking

If your business is in danger of going into default with your MCA or into a violation of the contract terms, your first move should be to hire an attorney and prepare for the possibility of facing MCA fraud charges. Merchant cash advance fraud can take many forms: making an offer for new financial assistance before all previous assistance has been repaid in full, not adhering to requirements for every lender on file, defrauding other MCA companies through illegal means. These are federal crimes, and defendants face harsh penalties.

Stacked MCAs often come with problematic acceleration clauses - provisions requiring payments in a very short time span. These demands can seem impossibly unfair. Worse, lenders sometimes pressure business owners to repay stacked MCAs immediately by threatening to file criminal charges.

These actions have a semblance of criminal conduct because borrowers promise to pay what they owe on time, and often at the rate stated in the agreement or in accordance with applicable state usury laws. Still, if you were late in repaying a cash advance, it would probably result in no more than a complaint of civil wrongdoing.

Civil and criminal actions are very different. The burden of proof in civil proceedings is "by a preponderance of the evidence" - the party bringing charges must prove their case by more than 50 percent. The standard in a criminal trial is "beyond a reasonable doubt," and prosecutors have the burden to prove each element of the alleged crime.

Once the wheels have been set in motion for you and your company to face criminal allegations, there is no good solution other than hiring a criminal defense attorney as soon as possible. Take action to ensure your company and your employees' livelihood remains secure.

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.