Documenting MCA Hardship: 10 Records for a Settlement Conversation

To settle, you need to demonstrate how much you paid back and show the funder why it would be unreasonable to pursue the amount they’re after. I suggest gathering a complete set of records, which will have no less than ten types. It’s smart to have a single record that shows what you still owe, or think you still owe, from your perspective, so you can compare that with what the lender claims in its last communication. But I always tell you that getting any particular result is outside my control.

You might think that there is a standard discount or settlement percentage, but there is no standard MCA discount. Factors like your agreements, payment history, revenue, the reasons you allegedly defaulted, funder conduct, the law, and whether you face a lawsuit all affect the outcome. Also, what you can afford is a huge factor.

Start with the MCA agreement itself, and not just the first signed copy. Pull every addendum, every side letter, any personal guaranty and any new agreement. It’s nice to have all of it, along with any security agreement and disclosure, as one separate document. Under New York law as of August 2023, sales-based financing providers like merchant cash advance companies must disclose the estimated APR if the offer is for $2,500,000 or less.

The second record to keep is the money trail between you and your funder. The funder will come in with its own version of what you owe, so it’s good to know your own version first. Write down the amount funded, what was the total the funder said you’d pay back, what was the total withdrawn and what was the payment history, and finally, the balance the funder says is left.

The third record is a complete set of your revenue records and your bank statements, so the funder can see the daily withdrawals squeezing payroll, vendors, taxes, inventory and you. You can use the bank statements to show a liquidity crisis. Look for the week or day where the MCA really did max out your accounts, making it hard to pay vendors and payroll.

The fourth record is a copy of any requests you sent for a reconciliation, and any default notices they sent back. You need a complete set of those requests, as well as the funder’s responses.

In the federal Fleetwood case, the court noted that not only did the funder never perform the reconciliations for excessive ACH withdrawals, but a funder representative said, “we do not offer breaks.” There, the implied rate was about 278.5%.

The fifth record is every customer or processor notice the funder sent out, and any proof they filed a UCC against the business. I also recommend keeping every communication you have with the funder.

The sixth record is any court papers you received. This might be a complaint, a judgment, a notice of entry of judgment, or a confession of judgment. And it’s important to know that talking with the funder about a settlement, by itself, won’t pause that case. If you were served, write down when the papers arrived and how. Did they get taped to your door, or did a courier deliver them? Get the response deadline reviewed promptly. Since August 30, 2019, New York bars filing confessions of judgment against out-of-state individuals or businesses with no place of business in New York, so the location of those confessions of judgment matters too.

The seventh record is a complete list of every other MCA you got, and what the status is. This list includes every funder, how much you got, what they claim you owe, when you took it out, when it defaulted, whether you made any complaints or requests for reconciliation, and whether it’s being litigated. Each of these funders usually wants its own agreement, so settling with one usually won’t do anything to the others.

The eighth record would be any contract for a debt relief company you hired to help you, what you paid them and what reached each funder, and the fees and balances you have left. Do not assume a debt relief program will include court representation. Get a clear answer about who does the negotiation, who covers what happens if the lawsuit starts, and what fees they charge.

For the ninth record, keep a list of every time you offered to settle and proof of any settlements you’ve already completed, with the signed terms, proof of the payment, and the releases for each one. Under Uniform Commercial Code 9-513, once there is nothing left to secure under the UCC, the lender must cancel the filing. After all the sold receivables are paid, a lender has 20 days after your request to file a termination. Keep a copy of that request.

The tenth record to have is a copy of any tax papers you get. Canceled debt is generally taxable income unless you can show that you were insolvent when the debt was forgiven. The IRS has its own insolvency worksheet. The IRS form for claiming this exclusion is Form 982, but only an accountant can tell you whether or not you can claim it.

You may be tempted to stop MCA payments to force a settlement, but many agreements call that a default. The funder may demand the full balance due, or sue. Don’t just stop paying without getting an attorney’s review first.

When a settlement offer finally comes, use the file. After it’s confirmed in writing that the daily withdrawals will end, and how much will still be due each month, make sure the offer includes an actual release, and ask the lender to confirm who exactly is released and who needs to send what. If it is not clear in writing, ask. Keep proof of every step.