Landscaping and Snow Removal Businesses: 6 Decisions About Seasonal MCA Payments

If your landscaping or snow removal business took a merchant cash advance last spring, you may be regretting it now. Revenue drops in the late fall or early winter, but the fixed daily debits do not. You have several choices. First, ask for a reconciliation in writing. Second, pay your payroll taxes and crew before the funder. Third, refuse another advance if one is offered. Don’t close the account or revoke ACH on your own, and negotiate a settlement in the off-season if you can. If it all goes wrong, you could face a lawsuit, and Subchapter V becomes a realistic possibility.

In a business that scales to the season, the costs come before the work does. Crews cost. Mulch costs. All that happens before the first mow and before the big deposit. Funders say yes in a day on the sight of spring deposits, and withdrawals come before contracts pay. Some of the balance can get repaid in the winter months.

Ask for a Reconciliation in Writing

Deposits in your business account slow and can even shrink or stop altogether. The MCA funded the earlier balance based on previous deposits, with a daily repayment rate set off of those higher figures. Even if business is currently stalled, the funder still wants the repayment you agreed to when revenue looked healthy. Your contract may let you ask for a “reconciliation” to account for the drop in the money coming in. Ask for a reconciliation in writing with the best record you have of incoming deposits from customers by month or by week. The lender may say yes or may say no. If you get yes in writing, keep the email or letter, and make sure that the agreement spells out a new payment amount. But don’t expect a yes. The New York Attorney General called out Yellowstone Capital for just this kind of alleged behavior. The attorney general said that Yellowstone promised to adjust payments to suit revenue, then took fixed daily payments that it almost never refunded.

Reread the contract that you signed to see whether you can ask and who may ask for you, how often you can ask, the specific documents needed and who you should send them to. A “reconciliation clause” may be mandatory (“the funder will reconcile the account.. .”). “May” in the wording means the funder can decide against a change to payments any time it wants. If the funder says no, keep the writing that shows you asked, and keep copies of the debits that continued in defiance of your ask.

Second, if you are down to cash, and only have enough cash to cover either the MCA lender, your payroll taxes, or your crew, your payroll tax liability comes first. The IRS considers payroll taxes as “trust fund taxes” for which you can face a personal liability, and paying other creditors instead of the IRS can count as willful conduct. Note that crew wages may also be fixed, to three-fourths of workdays in the case of H-2B employers. If an early frost or a late thaw hit mid-month, that could result in shortfalls.

Third, avoid stacking or other merchant cash advances. Avoid these no matter how attractive they sound, because each funder takes its own slice. Many MCA contracts ban taking any kind of added financing. That kind of ban can mean that taking another advance can be a default. With or without such a clause, you usually move the default later and make it larger.

Fourth, avoid closing your account, even temporarily, and don’t revoke the authorization you gave for the debits. Those could be defaults, too, and could trigger the entire balance due at once. Don’t put equipment in a new company. All of those things could mean a lawsuit later.

Negotiations with the Creditor

Fifth, try to get the issue resolved in the off-season. Your bank statements likely show the steep drop in revenue you need a reconciliation to cover. Those statements make excellent proof to show at negotiations with the creditor. However, in the off-season you may not have as much money to offer as settlement, and some funders do sue fast when debits start bouncing.

A good settlement agreement covers more than the number. When you settle for less than the total due, you will want a payment plan that works for your business, a personal guarantee that goes away, and a lawsuit dismissed from court, plus a file-stamped UCC termination for any UCC filed in the name of the business. You should also ask a tax professional whether forgiven debt is taxable income. Don’t sign any kind of agreement, even a forbearance agreement, without knowing what you sign. Some of those agreements can waive a later defense, add fees, or reaffirm the borrower’s promise to pay.

Sixth, if a funder sues, how long do you have to answer a summons? 20 or 30 days in many states. Don’t ignore the summons, and don’t miss the court date if there is one. If you get a summons for your MCA case, get to a defense attorney. Missing the window can let the MCA lender get a default judgment.

Subchapter V

If you have several funders and debits too large even after a reconciliation to revenue, a bankruptcy in Subchapter V may be the right call. This small business version of chapter 11 bankruptcy filing generally stops lawsuits, bank account levies and ACH debits. Best of all, Subchapter V plan payments may match a seasonal pattern if the court agrees. The eligibility maximum for a Subchapter V bankruptcy right now is $3,424,000 in qualifying debt. If you have that much debt, or less, give Subchapter V a close look. That limit will more than double to 7.5 million dollars if a new bill goes into law. Ask a bankruptcy attorney about the limit that applies to your business.

All six things go better if done early. Later some may be impossible. Gather all your agreements and monthly account statements for at least a year back, and chart monthly deposits or sales receipts from either the bank statements or the POS system, so that you can prove seasonal changes. Use those documents to prove in settlement talks or in court what happened. A good strategy with the funders may get started before the next missed debits, and not after the first lawsuit.