MCA, Term Loan, and Line of Credit: Seven Questions for Settlement Priority

There is no rule about the order in which to pay back an MCA, a term loan, and a line of credit. As a general rule, it is best to deal first with the debt that is draining cash daily or about to take enforcement action. Frequently, that will be the MCA, as it is often the debt closest to enforcement. It’s essential to review the documents and pending lawsuits to determine priorities.

Whether You’ve Been Sued

One important question is whether you’ve been sued. Businesses get letters all the time but this isn’t always a court case. Filing a lawsuit does not stop negotiations. It does not work the other way around, though; a call with the funder or a settlement company does not extend the deadline to respond to a lawsuit, so don’t wait on that. It is worth saving the envelopes for the records. When the lawsuit is received, it is best to get the documents reviewed by an attorney quickly.

Who Is Pulling Cash Right Now

The second key question is who is pulling cash right now. This is most often an MCA with its daily or weekly withdrawals. Those pulls come out of your business account, and that hits the payroll, the vendors, the rent, and the taxes.

One approach is to just block the debits from the business bank account to squeeze the funder into a deal. It is important to see what the agreement says, though. Many MCAs view stopping debits as a default and, if that’s the case, the funder may demand the full balance, add fees, notify customers, pursue guarantors, and sue. Unfortunately, that doesn’t make the problem go away and can escalate the dispute. A default notice alone does not settle every legal question, though, and doesn’t make the funder right. It is important to look at the agreement, the payment history, the funder’s conduct, and the law, to see where things stand. Do not change any payment arrangements without first talking to your lawyer.

The third key question is who can reach your customers and accounts. Priority usually goes to whoever filed a UCC statement or perfected first, but some liens (e.g. on purchase-money security interests) can jump ahead. An MCA funder may send a notice to each customer that the receivables were assigned, so your customers can only pay the funder and not you. So if the funder is starving the business of cash, this is usually a very high priority.

Confessions of judgment are another risk here, a kind of debt bomb buried in the terms and conditions. In New York the creditor may file a judgment only in the county where the debtor has a place of business. But if the confession is valid, it can be filed within three years of when it was signed.

A fourth question is whether the MCA is really a loan. In New York, an appeals court in LG Funding v. United Senior Properties (2020) looked at three things: reconciliation provision, finite term, recourse if merchant goes bankrupt. Check the reconciliation clause to see if the payments will adjust as sales change. Since August 2023, MCA contracts in New York are also required to show what APR you are likely to pay. If the funder has disclosed an APR, you can compare it to the term loan and line.

The fifth question is whether your term loan is actually an SBA loan. If the term loan is owed to the SBA, then the government becomes involved sooner or later. Delinquent federal debts generally get referred to Treasury Cross-Servicing. They can offset federal and state payments you would otherwise receive, garnish wages, report to credit bureaus, and use collection agencies.

Each Settlement Agreement

The sixth question is what each settlement will actually resolve. Each funder usually needs its own separate agreement. One deal does not settle the others. Make sure to get in writing whether daily debits will stop. Read the terms carefully, including who gets a release. Closing is not the same as signing a contract, and it may take several extra steps before the deal is complete. Make sure to check the payment schedule and the deadlines in each settlement agreement against the cash flow. A missed payment can restart the original amount you owe. Make sure you know who is responsible for filing a UCC termination statement and withdrawing customer notices. Keep proof of these.

If you are using a debt relief company that negotiates for you, ask who is negotiating (and their background), whether they also defend you if the funder sues, and what your fees are paying for. Enrollment does not mean that your case will be defended in court. And there is no industry standard settlement percentage.

Forgiven debt is usually taxable income. Banks and ordinary lenders usually send a Form 1099-C for $600 or more cancelled. If you were insolvent just before, you can exclude the debt up to the amount of insolvency with Form 982, but that’s complex and may have pitfalls, so you should ask a tax professional.

The seventh question is what if you cannot settle all three? A business bankruptcy filing creates an automatic stay that stops creditors collecting. The limit for Subchapter V is $3,424,000 in debts as of September 30, 2026. A bill raising the Subchapter V limit to 7.5 million dollars has passed Congress, though it was not yet law then.

To get started, the first thing is to list every debt: is it settled, in talks, in default, or facing a lawsuit? Bring every MCA agreement and guarantee, the amounts funded and repaid, withdrawals, bank and revenue records, default notices, UCC records, court papers, and any contract with a debt relief program. Then decide your priorities for who you will try to settle and when.