How to Restructure Merchant Cash Advance Debt: 6 Terms That Matter

Six Terms That Can Seriously Hurt Your Business

When a funder offers you a workout agreement, watch your back. The lower payment is the part that they want you to focus on, but there are six terms that can seriously hurt your business. Read about these terms like your future depends on it, because it does.

Workouts usually differ in the amount paid, how often or in what timing, but sometimes involve a smaller total amount. Be cautious. The workout offer comes from your funder’s lawyers, and the document is carefully worded to protect the funder. It is not the same thing as a settlement agreement, which ends the debt. Whatever title the document bears, what matters is what the clauses say.

The six terms are a general release, a reaffirmed personal guarantee, a new confession of judgment, a new default clause, a true sale acknowledgment, and a UCC lien. Each is likely to seem fair when you read the paragraph, but collectively they can affect your legal position.

It is risky to sign a general release before you know what claims or defenses you might have against your funder. You could be erasing important claims or defenses without even knowing it. That kind of clause can get rid of problems about whether payments were proper, or for that matter whether the contract was enforceable. You can strike the clause entirely, or create an exception for such claims.

Sometimes when the funder asks you to reaffirm a personal guarantee, it is accompanied by a new payment plan or lower payments. The new signature strengthens the funder. If your company goes out of business and the funder sues you personally on the guarantee, you may have fewer defenses available after having signed the latest piece of paper. Just because you are getting a lower payment does not make this a good trade.

A confession of judgment is a clause by which you agree that, in case of default, the lender does not have to sue you to get a judgment. The workout offer might add one in, even if you had one with the old agreement. The funder may be replacing a flawed old confession with a new enforcement document. New York law since August 30, 2019 (CPLR 3218) says that creditors can’t file confessions of judgment in New York against debtors living outside the state. For a business, residence is wherever the business has a place of business.

A contract and a lawsuit can involve New York even if your business isn’t located in New York. Read the contract: does it pick a governing law? That will often control how the document is interpreted. Also read to see if there is a forum clause picking New York as where any lawsuit has to be filed. Just because you are outside New York, don’t ignore a New York suit.

A default clause may say that if you miss even one payment, the entire remaining balance becomes due at once. Check the wording on notice and cure periods. Default can be triggered by other events than failing to pay. In reworking a default provision, don’t just move the tripwire. Aim to avoid the trip. Instead of an instant acceleration clause, ask for a graduated acceleration. Missed payments should bring notice, and a chance to cure before the whole balance comes due. A workout should give you a realistic path to pay the amount you owe, by payments you can afford.

A true sale acknowledgment clause says that the original MCA deal was a purchase of future receivables, and not a loan. Read it carefully. It can cut off the argument that it was really a loan, which is a central question in MCA lawsuits. The reason the question matters is that courts - especially in New York - try to see if the reconciliation is illusory, and will look at how the MCA treats a set maturity date, and what if any recourse the funder has if the merchant goes bankrupt. The reconciliation may be illusory, suggesting a loan, if the funder gets to keep whatever it took beyond your agreed revenue share, or if there is no reconciliation after you default. A fixed term (for example, one you can find by dividing the total owed by the daily payments), suggests a loan.

Make sure the workout agreement says the creditor will terminate its UCC filing (UCC-3) once the restructured balance is paid. Get it in writing so the lien does not hang around after it is paid. Under the Uniform Commercial Code (UCC), once nothing is still being secured, the creditor must file or send a termination within 20 days of getting a signed written request.

Be wary of a 48-hour expiration of the offer. Just because the deadline is short shouldn’t mean you have to forego review by an experienced lawyer. Since an agreement can last a long time, better to get the right one to start with. If you have multiple funders, settling for a “good enough” deal on the first can shift the squeeze right to a different funder.

A Business Bankruptcy May Be the Answer

When your workout isn’t enough, a business bankruptcy may be the answer. Where the amount of debt is overwhelming, or funders won’t work out together, or bank accounts are frozen, or judgment creditors have emerged, a bankruptcy case can enter the picture. One route is Chapter 11, and there is a Subchapter V designed for qualifying small businesses. Bankruptcy puts a stop to most collection activity. A workout is different from a bankruptcy. And yet the existence of one option can affect how the other can play out. The possibility of a bankruptcy case changes what each side can do.

If a lender settles for less than what you owed in a workout, the missing piece is generally taxable income for that year, unless it comes within an exclusion such as insolvency. Amounts excluded from taxation are reflected on IRS Form 982.

What You Might Be Trading Away

Plenty of good workouts happen. When you get a lower payment, be careful about what else the document does. Learn what you might be trading away before you sign.