November 9, 2021
Merchant cash advances might be appealing to small business owners in need of quick cash, particularly those who rely heavily on credit card sales. If you have accumulated an excessive amount of debt as a result of merchant cash advances, it is natural to be concerned. However, you can successfully manage your risk if you understand how to decrease your risk and/or protect yourself from too aggressive collecting efforts.
If your business has been diminishing, you may be at risk of defaulting on your Merchant Cash Advance(MCA) agreement with one or more lenders (for instance, due to COVID-19). This is true even if you could keep up with your daily or weekly payments before the decrease.
If you have lately been unable to make your daily or weekly MCA debt payments, or if you believe that your default is impending or likely in the near future, you should be aware of all of your alternatives and the activities you need to take to safeguard your business from the penalties of MCA debt default.
If a client believes they are about to fall behind on their merchant cash advance payments, we advise them to contact their merchant cash advance lender and explain the circumstances. Inform the funder that you are having difficulty and ask if they can change your payment structure or enable a forbearance period of temporarily halted payments. At the same time, you work through your present challenging moment. Many lenders will understand and will most likely give some temporarily changed payment arrangements.
Examine your MCA agreement to see if it contains a reconciliation clause. Many MCA agreements have stipulations that allow borrowers to request a revision of their payment amounts if their receivables or business revenue drops to avoid being branded a usurious loan. Some lenders may offer to help you, while others may not. If you are unable to reach an agreement on more affordable repayment terms with your MCA lender, proceed to Step 2 below.
One method for refinancing your merchant cash advance debt is to replace it with a Term Loan.Term loans are a wonderful choice for corporate debt consolidation because they have considerably better terms than MCAs. They have lower interest rates, longer repayment periods, and monthly loan installments rather than daily loan payments.
You could also try to refinance your MCA debt using an Asset-Backed Loan. An asset-backed loan is secured by your company's assets, which means that if you fail to repay the loan, the bank or lender can seize your assets to recoup the debt.
Property, goods, and personal guarantees are all examples of collateral for an asset-backed loan.Lenders view collateralized loans as less risky because they include a built-in safety net. Additionally, asset-backed loans have lower interest rates and longer repayment terms than merchant cash advances.
Defaulting on merchant cash advance payments is a terrifying situation for any business owner to be in, but having several creditors wanting to collect on your company's assets can be a huge advantage.To comprehend this benefit, you must first understand how an MCA lender secures collateral such as your business assets.
A creditor may get a security agreement to secure a loan against business assets, which is finalized through what is known as a UCC-1 (Uniform Commercial Code) filing. UCC-1filings, similar to a lien filing on the deed of real estate property (mortgage),are used to determine who has a priority security interest in your business assets.
When more than one creditor has filed UCC-1 files against the assets of a single business organization, as is frequent for company debtors with several debts outstanding, the UCC filings are given priority chronologically.
The first document to be filed is the governing rule. Suppose the first position creditor does not obtain full repayment of their loan balance. In that case, the second position creditor receives no payment, rendering the recoverable value of your assets over the amount owing to the priority creditor worthless.
As a result, if your firm assets are worth $50,000 and you owe $100,000 to your first position creditor, there is no equity in your assets for anyone other than the first lien holder.
Because there is no equity in your business assets, non-priority lien holders have less incentive to pursue you for damages. This puts you in a stronger negotiation position.This method can be used to prioritize negotiations with the first lien holder then later, knowing full well that junior creditors are in a weaker position, to negotiate settlement solutions with them.
If you discover that the receivables used to calculate your daily payments are less than the amount agreed upon for the advance. Yet, the MCA lender continues to withdraw the same amount each day; this is an indication that your firm is on the verge of default. Even if you have been paying on the advance without trouble for some time, if your business suffers and you do not have enough receivables in your account, a large daily payment will quickly become unsustainable.
Suppose your numbers indicate that you are on the verge of default because you cannot continue making payments in line with your repayment schedule. In that case, there are numerous essential variables to consider and strategies to take. Please keep in mind that when you signed your MCA agreement, you also signed a security agreement authorizing the MCA lender to file a UCC-1 lien against your company. This is specifically a lien against your future receivables.
Also, keep in mind that you have granted your MCA lender access to your bank account (s). That is, they do not require your permission to take funds from your accounts.
A merchant cash advance lawyer can help you effectively defend MCA claims that will very indeed be launched against your company and you personally as a guarantor of the merchant cash advance (s). A lawyer can also help you address your merchant advance delinquencies. Most of the time, qualified legal representation will cost a business owner substantially less than the amount that the business owner was paying to MCA creditors.
At this point in the process, once you have exhausted your efforts to resolve your MCA debts on your own, hiring a knowledgeable and experienced attorney is a wise decision.