Merchant Cash Advances (MCAs): Navigating Challenges and Chapter 11 Bankruptcy Solutions
Merchant Cash Advances (MCAs) are frequently marketed as quick and convenient solutions for small businesses facing immediate cash flow challenges. However, these financial arrangements often lead to significant financial distress, prompting many businesses to explore legal remedies like Chapter 7 bankruptcy or Chapter 11 bankruptcy for relief.
What Are Merchant Cash Advances?
MCAs function like payday loans for businesses. In exchange for a lump sum of working capital, businesses agree to repay the advance through a percentage of their future sales. While MCAs are not classified as traditional loans, they often carry extraordinarily high interest rates—ranging from 200-400%—and hidden fees.
These products target small businesses, especially those unable to secure traditional financing and exploit legal loopholes to bypass usury laws. This often creates a cycle of debt that jeopardizes both the business’s stability and the owner’s personal financial security.
Challenges Associated with MCAs
Small businesses from restaurants to healthcare practices frequently turn to MCAs during cash flow crises. However, these arrangements can quickly escalate financial strain due to:
Exorbitant Costs
High repayment rates that drain daily revenue.
Predatory Terms
Hidden fees and personal guarantees that extend liability to business owner’s personal assets.
Limited Legal Recourse
MCA contracts are often structured to avoid regulation under traditional lending laws.
In California, the legality of these practices is under scrutiny, since many business owners consider them predatory. Legal actions have been taken to protect businesses from unfair MCA practices.
How To Measure The Impact of Your MCA Debt
If your business is in MCA debt, it is crucial for you to analyze the impact this may have, and this involves key statements, such as:
Income statement
This involves revenues, expenses, and profits.
Balance sheet
What are your assets, equity, and liability.
Cash flow statement
Analyze your liquidity situation.
Assessing the Impact of Merchant Cash Advances on Your Cash Flow
Merchant Cash Advances (MCAs) often involve daily or weekly repayment schedules, which can place significant strain on your cash flow. To understand the effect on your finances, analyze your daily credit card sales and bank statements to evaluate:
- The percentage of your daily sales allocated to MCA repayments
- The impact of these repayments on your ability to cover operational expenses
- Whether MCA repayments are causing cash flow shortages or limiting your capacity to invest in growth opportunities, ultimately stalling business expansion
Managing multiple MCAs can amplify cash flow challenges, making it increasingly difficult to meet financial obligations and sustain long-term growth.
Addressing MCA Debt Through Chapter 11 Bankruptcy
Chapter 11 bankruptcy provides a pathway for businesses burdened by MCA debt to regain control. It allows for the reorganization of debts while keeping operations running.
Key Benefits:
- Cash Flow Preservation: Upon filing for Chapter 11, businesses can request court approval to use “cash collateral” tied up by MCA agreements to resume normal operations.
- Structured Repayment Plans: Chapter 11 allows businesses to propose modified payments based on the business’s ability to pay the MCA debts and extend the time to pay over several years, often up to five years. This extended timeline can reduce the immediate financial pressure.
- Potential Full Repayment: Many Chapter 11 plans successfully repay MCA lenders in full, creating a win-win situation where both the business and creditors benefit.
Personal Liability Considerations
MCA contracts often include personal guarantees, making business owners liable for repayment even if the business declares bankruptcy. However, a well-executed Chapter 11 plan that fully repays MCA debt can resolve these personal obligations.
Legal Strategies and Protections for Managing Merchant Cash Advances
If your business is struggling with MCA repayments, consulting a merchant cash advance attorney is crucial. These legal professionals can assess your situation, explore alternatives, and navigate complex bankruptcy procedures.
When all other options are exhausted, leveraging legal strategies can provide critical protections for your business. While legal action should be a last resort, understanding your rights and available legal protections is essential.
Know Your Legal Rights
Review Your MCA Contract:
- Thoroughly examine the terms of your MCA agreement.
- Identify any potentially unfair or deceptive practices.
- Check for compliance with state usury laws and other applicable regulations.
Usury Laws:
- Many states cap interest rates on loans, but MCAs often argue they are not loans to bypass these limits.
- This classification can be legally challenged in some cases.
- Consult an attorney to determine if your MCA violates state usury laws.
Unfair Business Practices:
- Look for hidden fees or misleading terms in your agreement.
- Document aggressive collection tactics or threats from MCA providers.
- Such practices may provide grounds for legal action or negotiation leverage.
The Federal Trade Commission (FTC) offers guidance on small business financing and borrower rights, which can be helpful in identifying unfair practices.
Exploring Debt Relief Through Bankruptcy
Bankruptcy is a last resort but can offer a way out for businesses overwhelmed by MCA debt and other financial obligations. The United States Courts outline two primary bankruptcy options for businesses:
Chapter 11 Bankruptcy
- Enables businesses to restructure debts while continuing operations.
- May reduce MCA debt and offer more manageable repayment terms.
- A complex process requiring careful planning and legal expertise.
Chapter 7 Bankruptcy
- Involves liquidating business assets to settle debts.
- Can discharge most business debts, including MCAs.
- Results in business closure but may provide personal debt relief for sole proprietors.
Key Considerations Before Filing
- Impact on credit scores and future borrowing.
- Risk of losing personal assets if personal guarantees were made.
- Legal and administrative costs of bankruptcy proceedings.
Defending Against MCA Collections and Lawsuits
If you are dealing with aggressive collection efforts or lawsuits, it is crucial to respond promptly to any legal notices to avoid default judgments.
Prepare a course of action to:
- Negotiate with MCA collections
- Stop the constant harassment for payment
- Prevent the disruption to your business operations
- Avoid lengthy and expensive legal proceedings
You may also challenge the validity of the agreement by arguing that the Merchant Cash Advance (MCA) qualifies as a loan rather than a purchase of future receivables, which could make it subject to usury laws and other regulatory protections.
Additionally, document any harassment or threats from collectors and report such violations to the Federal Trade Commission (FTC) or your state’s Attorney General.
Seeking injunctive relief is another option, as it allows you to request a court order to temporarily halt MCA collections, giving you time to negotiate or explore alternative solutions. Finally, consider pursuing counterclaims against the MCA provider for unfair business practices or legal violations, as these claims can strengthen your negotiating position or support your defense in court.
Contact S&B Legal if you are facing financial distress as a consequence of Merchant Cash Advances. We offer a free initial consultation in San Diego and Los Angeles.
