5 Documents to Review Before Sending Them to an MCA Collector

Many business owners don’t have any idea of how to respond and often, they give the MCA collector a whole bunch of information that they might not have asked for. And this only makes things more confusing. If you defaulted on your Merchant Cash Advance (MCA) or got behind on payments and cannot catch up or if you have been threatened or sued by your funder or a collector then, do not make another move until you have checked the following five documents: The text of your MCA agreement and all addenda, a recent payment history and payoff statement, bank and merchant processing statements, any collection letters or court papers and, when you settle, a written settlement agreement. Funders will read everything you send to know what they can recover and how fast. Read what you send the funder before you send it.

MCA Agreement

The first document that you should check is the text of your MCA agreement and all addenda. If you have no access to them, then you are bound to be in trouble because it will be tough to negotiate with the funder or collector without them. Non-lawyers worry most about what the agreement says, and skim by the small print. Courts worry most about what the law will do, and apply rules that can override the words of the deal. Some MCAs take payments from the business bank account, and others take a percentage of credit card sales. Check if the reconciliation clause lets you request payment reviews if receipts drop. On appeal, courts in New York tend to look at a reconciliation provision, whether the deal was for a finite term, and whether the funder was taking recourse in bankruptcy, as the most important factors. And if a court finds the contracts are loans, they will be subject to New York usury laws that make it a crime for funders to knowingly charge more than 25% a year.

Here are some dangers that can be lurking in the fine print. Watch out for a personal guarantee and a confession of judgment, plus any UCC filing. If there is arbitration language, you may have to use an arbitrator instead of a court. In an FTC case, a court found one MCA funder kept enforcing personal guarantees even after advertising none.

Finding the Correct Balance Owed

A recent payment history is important if any questions arise about what happened. A payoff statement may have to be provided by the funder or collector to see what your correct balance and payoff are. Once you have a payoff statement, look it over to see if any fees and the payoff make sense. Finding the correct balance owed is critical for settlement. People still think there is a magic number to settle debt by. Your funder may look at what you have already paid, how old the account is, your revenue and how likely the funder is to collect in full.

You will need to show your bank statements and processor statements for the last three to six months. Bank and processor statements let you look at cash flow. Add a profit and loss statement to see what your business can support now. They all make for great “proof” in settlement negotiations. Make a summary of the costs that went up, sales that dipped, customers that delayed paying or whatever changed. A reconciliation request may need it to show how bad things got.

To settle, you need clear records, documented hardship and a realistic proposal. Don’t write a manifesto. Don’t blow a good proposal by saying too much or getting aggressive. With several funders, one deal affects how much cash you have for others. You may be shocked to find that doing settlement talks alone doesn’t stop daily ACH. Blocking withdrawals or closing accounts can bring fees or a lawsuit. Ask an attorney first.

Collection Letters and Any Court Papers

Look at all collection letters and any court papers carefully to catch any mistakes, and to know what is going on. The federal Fair Debt Collection Practices Act covers only personal or household debts, so generally not business debts or business MCAs. Since August 2019, a funder may no longer file a confession of judgment in New York against a debtor with no New York residence or business. The New York Attorney General settlement with Yellowstone Capital says all debts owed to Yellowstone companies are automatically canceled. The worst of all the letters to get is the lawsuit itself. But a judgment, or a notice that the creditor plans to freeze an account or take an asset, can be just as damaging. In those cases, legal advice may be especially important before replying.

After the payoff terms are agreed upon, you should get your settlement agreement in writing. It should say the balance, pay terms, and consequences if you default. It should show an agreement to settle and release the whole dispute. Read the agreement and never be afraid to question any part of it, especially if something on paper does not sound like the agreement you made on the phone.

Does the agreement say only that it settled the account, or that they gave a full release from the agreement? Where they apply, check that the settlement says the personal guarantee is released, the lawsuit dismissed, the judgment satisfied, the ACH withdrawals stopped, and that the UCC filing is terminated. Under UCC law, once nothing is owed, the funder must terminate the financing statement within 20 days after your written demand. Keep track of the time, because termination is not automatic.

One painful mistake people make is to skip the last step. They save every receipt until the moment they pay, but then drop the ball. Create a storage spot for the signed agreement, ACH confirmations, proof of payoff, UCC termination, notice of judgment satisfaction, and court dismissal order. And ask your tax professional about possible tax consequences when debt is forgiven.