Merchant Cash Advance Loan Default
Before the 2008 financial crisis small businesses used their home equity to acquire short term capital. Increasing house prices allowed them to borrow against their homes to use funds for their businesses for inventory, hiring more employees and other business expenses.
After the 2008 home equity was crippled nationwide and lending standards were drastically tightened. Business owners who needed capital were turned down by conventional financial institutions and had to turn to the alternate lending industry for capital.
They turned to Merchant Cash Advance Loans (MCA) and were charged very high rates. MCA loans are an asset based type of funding were the lender is purchasing your future receivables. Lenders will purchase accounts receivable or buy your equipment and lease it back to you so that you have excess to some funds. The MCA loan is a product where the funder is purchasing a portion of your future receivables. You receive the cash and pay the funder daily or weekly percentages of your sales.
If your business goes through a slow period and you cannot pay your funder there are different scenarios that you may find yourself in:
- The MCA cannot collect because they have purchased your future receivables but your business is no longer operational and there is no collateral. They cannot report you to a credit agency because they are not a legal lender. Often the funder does not make an effort to collect from a business that is closed.
You cannot however do the following:
- Switch bank accounts
- Interfere with the MCA’s ability to collect ACH payments
- Switch merchant services processing companies
- Take cash or other payment terms to reduce revenue in your bank account
If you do so, the MCA may accuse you of breaching your Merchant Cash Advance Agreement and may try to pursue you.
2. You have borrowed from the MCA to fund operations since business has slowed, you have spent the funds on inventory, hiring staff and advertising, but business has not picked up and as a result you cannot meet your monthly repayments and you are owing vendors more.
Initially, you need to approach the MCA lender and try to modify or defer payment until your business improves and you are on stable footing again. You need to create a comprehensive and detailed business debt schedule after carefully analyzing your business debt situation.
After you have made all the effort and still cannot pay, you need to stop the auto withdrawals. The MCA lender has limited right and limited collateral. Usually, these accounts can be settled for a fraction of what is owed even if the business remains open. Calls and harassment from the MCA lender is bad enough.
If you are faced with unmanageable Merchant Cash Advance debt, speak to one of our experienced business debt relief. Schedule your free initial consultation to find out more about how we can assist you with: