A merchant cash advance (MCA) is when a creditor lends entrepreneurs money in exchange for a commission on future sales or a collection of fixed debits. It’s typically used by business owners to generate cash flow into their ventures while they’re still waiting for profits from their customers’ credit or debit cards.
As with any financial agreements between two entities, you should be mindful of potential merchant cash advance legal issues before you sign the contract. While you may need the money urgently, you have to weigh the advantages and disadvantages of this type of financial support to ensure that you aren’t getting the short end of the stick.
MCA providers are adamant that their cash advance is different from a loan. They do give you money upfront, which you can use for your business’ needs, like the sum you get from banks and other financial institutions. Plus, they have additional charges for their services. However, the similarities end there.
One primary difference is that their profit comes from factor rates instead of interest rates. This means that the service cost isn’t dependent on a specific period. Moreover, the MCA provider assigns this rate based on your risk assessment. A significant implication is that you won’t be able to save money even if you repay your advance quickly, unlike when you pay off your credit card debt faster.
There are two standard merchant cash advance repayment structures:
- Sales Percentage
This is the most common structure that MCA providers use. With this, the company lends you the amount you need in exchange for a slice of your future profits. They automatically take a cut from your credit or debit card sales until you’ve repaid the borrowed amount along with the factor rate completely.
For instance, if you take a 30,000 USD MCA for new equipment with a factor rate of 1.5, you have to repay the provider with 45,000 USD. The total fees would be 15,000 USD.
Most companies have a repayment period of three to 12 months. If your credit and debit card sales are high during this time, then you can repay the lender quicker. Conversely, at the other end of the spectrum, slow sales can stretch the duration of your repayment period.
- Fixed Withdrawals
This type of agreement entails a daily or weekly amount that’ll be taken from your business bank account. The sum is calculated based on an estimate of your monthly profits before the company approves your merchant cash advance application.
For instance, if you have a monthly revenue of 80,000 USD, then the amount to be withdrawn from your account would be 266 USD for daily withdrawals or 1,866 for weekly withdrawals. One major risk with this repayment structure is that you’ll have to pay the amount regardless of whether sales are low.
Merchant Cash Advance Legal Issues
You’ll have to be careful about forgetting your repayment schedule because that could lead to legal issues. Merchant cash advances are a valuable financing option, especially if you need money right away. However, as mentioned above, you have to think really hard on whether you and your business can keep up with the repayment structure.
Missing out on even just a single payment schedule can push lenders to interfere with your business. They can impede your operations with non-stop collection calls in the hopes that you can cough up the money for the minimum amount due for that period.
They also have the option to contact your customers and send them a copy of a Confession of Judgment, which allows them to enter a judgment against you without the need for a trial. This can destroy your existing business relationships and dissolve any chance that you can repay the loan.
You must find a lawyer who specializes in merchant cash advance cases because it should be handled differently from other types of debt. Acquiring the assistance of legal professionals can help minimize the interference of your creditors. They’re also proficient in negotiating settlements or repayment arrangements to ensure that both parties win in the end.
If you’re in dire need of additional capital for the time being, merchant cash advances are a useful financing option. However, you have to think about its pros and cons because of the potential legal issues that may arise, particularly with missing or defaulting on repayments.
Creditors have their best interests in mind when they lend you the money, so it makes sense that they would do all that they can to regain their capital and profit. If you find yourself with an MCA lawsuit, you should look for a lawyer who specializes in handling this type of case so that you can get a good deal out of the arrangement, whether through settlements or negotiating for a different repayment setup.