MCA Settlement Offer Letter: Template and 6 Terms to Address

An MCA settlement offer letter proposes a lump sum or installment payoff of a merchant cash advance to the funder. Offer letters often start (and stop) with the proposed payoff amount. That is only part of the picture. Payment is the centerpiece of the deal, but there are five other key terms. What is released? Who? When do the daily withdrawals stop? What happens at default? Do they file suit paperwork? Terminate the UCC? Send customer notices? Is there a cure period? These terms are all essential; discuss them in the letter.

If you have been sued by the funder, you probably also have a deadline coming due for a response or an appearance in court. Get that deadline on your calendar, because it does not change just because you are talking settlement. While talking, gather the documents that establish the facts, such as: the MCA agreements, guarantees, the payment history of the repayments actually made and the funder’s stated outstanding balance. When it comes to the proposed offer, keep in mind each funder generally wants its own written settlement agreement. Another funder’s loan does not disappear because you are paying the first.

Sample Settlement Letter

Here is a sample settlement letter you could adapt.

Dear [Funder],

This letter is sent as a settlement offer and negotiation proposal. Under consideration is the advance agreement and related documents dated [X] and the merchant cash advance of [Amount] to [Borrower] [and guarantors]. I understand that [Company]’s balance on the subject funding is $___. The repayment will come as a lump sum on or before [date], OR with monthly installments of [amount] for [number of months]. From [date] there will be no additional deductions, withdrawals or charges against the account.

Upon Merchant’s payment of the above-stated Payoff, Funder will dismiss all of its claims arising from its cash advance, close the account, terminate ACH drafting authority, and release any UCCs and their associated payment guarantees or notes that relate to this account, as to Merchant and its owner/guarantor _______ ________. Funder’s reply to this offer is due by _____.

Sincerely, [Owner name, title]

The Settlement Agreement

The agreement should specifically identify what is released, and release it with respect to the borrower and each individual guarantor. You might have entered into multiple MCAs with this funder and the other MCAs may (or may not) get dealt with in this settlement. The goal is to re-start without the cloud of any ongoing claims.

In building your offer, you typically compare the funder’s balance to your payment resources. It could be a lump sum payable by a certain date, or in installments. And, give yourself enough time so you don’t fail through your own bad schedule planning. Be careful in the lump sum scenario that the payoff can actually be made. It does not buy the rest of the deal if you get an agreement for a lump sum and then can’t deliver the payment.

If you and the funder agree on installment payments, the terms should include what happens if any payment is missed. Can one late installment default the entire balance (i.e. accelerate the entire amount due and payable now) or are you extended time to cure the missed payment? This cure period is critical in two respects. It lets you recover from an unexpected delay or a payments problem and it stops the other side from claiming you are in default the minute after the scheduled payment date.

Daily or weekly payments should stop on a certain date (not that they get suspended because you’ve proposed a deal). Whether they end or are replaced by the new deal ACHs, ask who makes the changes at the bank. Do not trust the handshake agreement or the promises, or verbal confirmations, on the phone. Ask for confirmation emails.

The settlement agreement should specifically deal with the lawsuit or judgment paperwork. Was a lawsuit filed? If so, you need court judgment paperwork, either a dismissal of the lawsuit or a satisfaction of judgment filed. Agree what happens to the lawsuit or judgment in case of a settlement, and in case of a default. Don’t pay or wire money for a settlement and then find out that the funder did not release the lawsuit.

Are there UCC filings? You need termination paperwork for any that relate to the settlement deal. Ask the funder for a list of its UCC filings and agree that they will terminate them as part of the settlement deal. Section 9-513(c) of the UCC contains a filing termination procedure for commercial financing arrangements. If nothing more is owed or committed under the transaction, or where the filing covers accounts that have all been discharged, the secured party must file or send the termination statement. It has 20 days after the debtor’s formal demand. You have to get the secured property marked free of a lien on purpose. Review the notice terms in your settlement negotiation. One additional provision is to stop the notices to your customers if that was the collection method being employed.

Tax Consequences

There is one other question that needs an accountant’s answer: tax consequences. A debt reduction can have taxable income implications for the business. Certain creditors have to file a 1099-C when they cancel $600 or more of debt. The insolvency exclusion can cut out some or all of the forgiven debt. The insolvency exception has a dollar for dollar limit that matches how much you were insolvent right before the debt was forgiven. Debt that is excluded is reported on Form 982.

You are not finished when the settlement is signed. It may state that you send the payment and they send back the paperwork that finalizes the agreement. Check that all the promised release, termination, dismissal and satisfaction filings are completed. Get written confirmation. Do you have payment evidence and receipt?