Is the Debt Relief Offer Actually New MCA Financing? 5 Paperwork Tests

Some bad MCA debt relief programs are repackaged or re-purposed as new MCA financing. If a merchant is obtaining cash to pay off a prior merchant cash advance, then it’s a new loan or cash advance. If the cash is going to a third party (e.g. creditor), then it’s most likely a new loan or cash advance. The deal is what it is, regardless of what it is called. A merchant can be pushed into an agreement that turns out to be something different than the merchant thought they were getting.

In theory, a new cash advance to pay off an old one doesn’t really count as real relief. Why? Because new money is not actually reducing any of the outstanding debt. A merchant must ask upfront if the transaction involves obtaining new money.

Real relief: typically there is no new money but some form of modification to the terms or balance of an existing cash advance, receivables factoring agreement, or small business loan. The merchant and creditor may agree to change the remaining amount, the payment terms, or forgive an outstanding balance.

Look at the cost of the new cash advance compared to the old one. What’s the total cost of the new advance? What matters the most is the amount of money received and what it takes to pay it off, whether it’s a new loan, line of credit, MCA loan or line. Five paperwork tests may help pinpoint whether a program is really debt relief or re-packaged MCA financing.

Test one: Always expect something in writing before agreeing to the offer. A financing disclosure is a common means of presenting a financing or cash advance. Whether or not this type of disclosure is legally required may depend on the state law regulating merchant cash advances. New York requires standardized disclosures on commercial financing and merchant cash advance offers up to $2,500,000. California has a similar law that covers offers of $500,000 or less. Texas requires disclosures on sales-based financing offers below $1 million.

Test two: A good finance disclosure must have basic information, such as the terms of repayment, the total amounts to be paid, and the charges for obtaining the financing. The details are often in a table. In New York the table would include: the amount to be funded, the estimated APR, the finance charge, the estimated total payment, the estimated payment, the payment terms, the estimated term, whether payments may be prepaid and whether collateral is required; and another line for the monthly cost if the payment term is other than monthly. Read the numbers or have someone explain the financing terms using numbers, not math formulas.

Test three: If a merchant signs up for a new cash advance from the same original funding company, the new money is likely just a refinance of the existing debt. If a renewal or refinance by the same company, then the borrower must look very carefully at the fees and costs. In New York, the disclosure has to state whether the renewal includes amounts used to pay unpaid finance charges or fees, or in other words a ”double dip”. There must be an itemized line for “Amount Paid on Your Account with Us” under California law.

Test four: If part of the new cash advance is going to pay other funders, then that’s a red flag. This means that the loan or advance is paying off other debt. If required payments to third parties are unknown to the provider, the New York disclosure must explain that the amount to the business may change. California requires a line for each required payoff to someone else. Compare the money actually deposited into the account to the amount the financier promised.

Test five: Beware of a payment provision that requires fixed payments regardless of business income. This means that the provider gets paid regardless of any business slowdowns or downtime. What would happen if the business had a drop in sales, a bad quarter or a recession? The New York Attorney General alleged that Yellowstone Capital, a funder, didn’t actually make “cash advances”, because it was taking fixed daily amounts from merchants whatever the revenue. Additionally, look for a confession of judgment. Texas considers a confession of judgment abusive. In New York, it is now illegal to file them against out-of-state residents.

Has the debt relief provider seen any documents other than your application? Any percentage figure that came before they saw your agreements and records must have come from a pricing sheet. Ask when they get paid, e.g. at settlement or closing. Upfront fees reward enrolling a client. Fees upon a successful deal reward closing a deal, not necessarily the right one. Neither is necessarily disqualifying, but not being told which one applies is.

Debt Settlement

If a deal or program requires you to stop payments on your debts, then it is debt settlement. (They like to call it something else.) Between the time a merchant stops payments and a settlement, the funder may accelerate, enforce and sue. If the service provider recommends that you stop paying, ask how the plan addresses the consequences of doing so. Under federal tax law, any settled debt is generally taxable income, unless it’s an exclusion like debt discharge because of insolvency. If sued, do not ignore the legal proceeding. Do not wait. Contact a lawyer who knows local law immediately.