Eight MCA Collection Claims to Examine Before You Respond

Eight Things to Check

The notice of default from an MCA company is not a court order, not a levy or lien. No judge has ever seen it. It is still only the funding company’s claim about what the contract says. The company can say whatever it wants, but there are eight things to check before agreeing to any changes or making a response.

Eight things MCA companies might put in their demand letters:

• It is a court order;
• you owe it all now;
• it was a sale so no usury;
• we have a confession of judgment;
• we will sue in New York;
• we will reach your customers;
• you owe personally;
• no law protects you.

Each one needs checking for its own reason. Some are hollow; some are real.

Is this a court order? No. This is a default notice. That’s like being notified that you are accused of murder. It doesn’t mean you have been judged guilty. A notice does not freeze your bank account. Its threatening language doesn’t change its legal substance. Usually to place a restraint, the funder has to file suit in a New York court. Once they file, you get served with the papers, and if you don’t answer in the prescribed time the funder can get what is called a default judgment. After getting a judgment, the funding company can use restraining notices to freeze your bank account temporarily. The bank will hold up to twice the amount of the judgment. The rest of the money is free. If there is an outstanding New York judgment or a signed confession in your file, that raises new questions. Get a copy of the paper. Find out the status of your file before paying or conceding anything.

Next claim: you owe everything now. A missed payment can trigger the dreaded acceleration clause, when all the unpaid purchased receivables are turned into one lump-sum demand plus default, NSF and attorney fees, if the agreement allows. The first number to check is the math. Remember, the factor rate is not an interest rate but a multiplication factor on the funds you took in. Say you received $50,000 with an agreed factor rate of 1.45. That is $72,500 to repay. Say you have paid $30,000 when the funder claims you’re late. That’s $42,500 left on the contract. In theory the funder can demand $42,500 instantly plus any fees the contract allows, which can feel overwhelming at first. As in most legal questions, look at the paperwork first. They can demand anything, but that doesn’t mean they are owed it.

The label on the default matters too. You have to look at the contract. It may make a distinction between a breach and a default. The contract may have a cure period that the notice omits, intentionally or by accident. A cure period is your chance to fix a problem.

Then there is the sale claim. Calling the deal a sale of receivables does not control. To determine what an agreement is in substance, look closely at how the payments operated in practice. What the funder claims it bought cannot change what payments depended on when you signed. Could you reconcile payments based on actual sales, or was there no effective way to square the numbers? Did the funding company really take on business risk and expose itself to your financial performance?

On that question, in 2020, one New York appeals court (LG Funding) looked at three things: a reconciliation provision, a finite term, and recourse if the merchant goes bankrupt. If a loan, usury matters. Criminal usury is above 25 percent a year. Corporations cannot use a civil usury law. Corporations can still raise a defense under the criminal usury law in New York. Check with a lawyer if this applies to you.

Next: the confession of judgment. In theory it lets the funder get a judgment and collect the unpaid balance without having to sue. A confession of judgment still has limits on where and when it can be filed, and those limits are worth checking. In 2019, New York limited the enforcement of out-of-state confessions of judgment by allowing a confession to be filed only in the county where the defendant lived when signing or at the time of filing. It must also be filed within three years of signing. Even if it can be filed, that doesn’t mean every confession of judgment is valid. Check for proof of the agreement, the parties, and the New York filing that complies with the New York law about when and where it can be filed.

Then there is the New York threat. If the contract has a New York forum clause, the suit can happen even if your business is in Texas, Florida or someplace else. When it does, do not ignore the complaint. Without filing an answer, even one that raises jurisdictional defenses, you can get a default judgment that hurts your business down the road. Some contracts say that blocking ACH payments is a default, so think before you stop payments.

Next, the threat to your customers. A UCC-1 lien notice can be tricky, and it is not necessarily a bluff. Once your customer gets a signed notice that the account was assigned and to pay the funder, paying you no longer clears what the customer owes. You can also look up the UCC filing to see who it names, what it claims is assigned, and when it was filed. Lien rights don’t last forever. UCC registrations expire after five years unless renewed.

Then: you are personally liable. Do not assume it is true. Check for proof that a personal guarantee was signed. You also have to look at a personal guarantee itself: what it says it covers, what it says triggers personal responsibility, and whether it is enforceable. A demand letter alone does not prove you owe the money.

Last: no law protects you. Partly true. The FDCPA applies to the collections of consumer debt. Business debt usually falls outside it. Still, in New York, contracts can be time barred in six years. Also, if you file a bankruptcy case, an automatic stay stops most collection.

Gather Three Things

Before you respond, gather three things. One, the merchant cash advance agreement, together with any renewals. Next, your payment records, along with the bank statements to prove it. Three, the notice of default itself, including its envelope or the email it was attached to. If the funding company sent any messages, put those together too. Finally, if it turns out the funding company filed a UCC-1, get a copy. The notice says what the funding company wants to do. The contract and the law control what the company can do.