While MCAs are marketed as a quick fix for cash flow issues, they often lead to financial distress, especially for small businesses. In California, we help clients struggling with merchant cash advance debt relief by guiding them through Chapter 11 bankruptcy as a means to restructure their finances and regain stability.
Key Takeaways
- MCAs often lead to financial distress: Merchant Cash Advances (MCAs) offer quick funding but impose extremely high interest rates (200%-400%) and hidden fees, often leading small businesses into a cycle of unmanageable debt and potential failure.
- Chapter 11 bankruptcy offers relief: In California, Chapter 11 bankruptcy allows businesses overwhelmed by MCA debt to restructure their repayments, free up cash flow, and continue operating while working towards financial stability.
- Personal liability risks for business owners: MCA providers often require personal guarantees, putting business owners’ personal assets at risk. Successfully completing a Chapter 11 reorganization plan can protect both the business and the owner’s personal finances.
What is a Merchant Cash Advance (MCA)?
A Merchant Cash Advance (MCA) is a form of alternative financing, similar to payday loans but targeted at businesses. Companies that cannot secure traditional financing may turn to MCAs for a quick injection of cash.
In return, MCA providers take a percentage of the business’s future sales or daily credit card transactions as repayment. Unlike conventional loans, MCAs are not subject to California’s usury laws, allowing them to impose sky-high interest rates—often ranging from 200% to 400%—in addition to hidden fees [1].
While MCAs can provide immediate cash flow, the long-term financial burden often outweighs the short-term benefits. Many small business owners in California are discovering that these advances can lead to a cycle of mounting debt and potential business failure.
MCA Practices Under Scrutiny in California
The legality of MCA practices has increasingly come under scrutiny. While these advances are legally valid and enforceable, many business owners feel they represent predatory lending practices.
In California, various legal actions are being taken to protect businesses from unfair MCA practices, as awareness grows around the harm caused by hidden fees and unmanageable repayment terms.
Several years ago, the MCA industry in California faced a series of class-action lawsuits, some of which were settled.
Since California law does not cap interest rates on most loans of $2,500 or more made by licensed entities, many merchant cash advance companies have obtained licenses under the California Finance Lenders Law (CFLL). With a CFLL license, even if merchant cash advances are reclassified as loans, they are not considered usurious under state law.
Chapter 11 Bankruptcy as a Solution for MCA Debt Relief
In California, Chapter 11 bankruptcy provides a powerful tool for businesses overwhelmed by MCA debt. When businesses file for Chapter 11, they gain immediate protection from creditors and can reorganize their debts, allowing them to continue operating while working toward financial stability. Here’s how it works:
1. Freeing Up Cash Flow: MCAs are typically considered secured debts, meaning they have a claim on the business’s “cash collateral” (such as future sales). Upon filing for Chapter 11, we work with the Bankruptcy Court to free up our clients’ cash flow, allowing them to continue operating the business.
This step is crucial in keeping the company afloat while reorganizing debt.
2. Restructuring MCA Repayments: Through a Chapter 11 plan of reorganization, businesses can restructure MCA repayments, extending them over a five-year period. With approval from at least one class of impaired creditors, the plan allows businesses to pay their MCAs in full over time.
This arrangement benefits both the business and the MCA provider, as it ensures repayment while giving the business the time and breathing room needed to recover.
Personal Liability Considerations for Business Owners in Merchant Cash Advance Debt Relief Cases
In many cases, MCA providers require personal guarantees, making business owners personally liable for their company’s debts. This means that even if the business reorganizes, the owner’s personal assets could still be at risk. However, by successfully completing a Chapter 11 plan that fully pays off the MCA debt over time, owners can protect their personal finances from further liability.
This makes Chapter 11 an essential tool for not only saving the business but also safeguarding the owner’s assets. Get in contact with a Chapter 11 bankruptcy lawyer or a merchant cash advance attorney to get your business back on track.
Summary
Merchant Cash Advances, while appealing at first, can create a serious financial strain on California businesses. Small business owners facing MCA debt should seek legal advice to explore all available options, including reorganization under Chapter 11 bankruptcy.
With the help of experienced attorneys, businesses can regain control of their finances, restructure their debts, and emerge from cash advances and bankruptcy in a stronger position to succeed.
At SB Legal, we have extensive experience handling Chapter 11 bankruptcies and are well-versed in dealing with MCA-related debt relief. We are here to help clients navigate the complexities of this process, ensuring their financial future is protected.
Frequently Asked Questions
Can I discharge a Merchant Cash Advance through bankruptcy?
Yes, you can potentially discharge a merchant cash advance (MCA) through Chapter 11 bankruptcy. However, the process is complex. MCAs are often structured as sales of future receivables, not traditional loans, which can affect how they’re treated in bankruptcy. Chapter 11 can help reorganize debts and negotiate payment terms, but whether the MCA is fully dischargeable depends on the specific terms of the agreement and court rulings.
Will filing for Chapter 11 bankruptcy stop a Merchant Cash Advance lender from taking funds from my business?
Filing for Chapter 11 bankruptcy can trigger an automatic stay, which temporarily halts collection efforts from most creditors, including MCA lenders. This stay prevents MCA lenders from debiting your business accounts or seizing assets, giving you time to reorganize your debts and negotiate with creditors. However, the stay isn’t permanent, and lenders may request court approval to continue collections if they argue that their interests are at risk.