MCA and Business Credit Card Settlement: Six Contract Differences to Review

Negotiating with your credit card company differs from negotiating with an MCA lender, because the two types of credit are built differently from the start. Two business debts can show the same dollar amount, monthly payment and interest rate, but the contract language behind the debts will still dramatically affect how easy each one is to settle. When negotiating a settlement on an MCA, you’ll need to find out whether it’s actually an MCA or a loan. Then, you’ll need to check for these terms: is there a reconciliation clause? Is there a confession of judgment clause? Is there a UCC filing? Is there a personal guarantee? And finally, you’ll need to remember that business cards lack the same consumer protections that personal credit cards do.

MCA Contracts

MCAs are generally written as purchases, not loans. Courts don’t always go by the label though. New York appeals courts, for example, generally weigh three factors: a reconciliation clause, a finite term, and the funder’s recourse if the merchant goes bankrupt. Credit card lending is plainly a loan. The label matters, as bankruptcy law treats a purchase and a loan differently. Whatever the label, there is no standard settlement reduction. It depends on the provider, the unpaid balance, the payment history, and whether there is a lawsuit or judgment.

Any time your business is struggling, it’s worth checking whether there’s a reconciliation clause in your contract. MCA contracts often have language that allows you to request an adjustment to the payments if the business’s revenue falls. This means a reconciliation clause is your chance to adjust the repayments before you stop paying. Even if there’s a reconciliation clause in your contract, it may only be a formality. In LG Funding (2020), a New York court allowed an MCA lawsuit to proceed because the reconciliation clause might just be window dressing. Yellowstone Capital’s contracts promised flexible payments but funders took fixed daily amounts, often over just 60 or 90 days. If the MCA funder has been pocketing fixed daily or weekly payments, it’s possible that the reconciliation clause just isn’t meaningful. This can give you leverage in negotiating.

A confession of judgment lets the MCA funder skip some of the process of suing your business. Some states restrict their use. Several states also bar confession of judgment against out-of-state merchants. New York law allows filing in the county where the borrower lived at the time of signing or lives now. The law adds that a business resides wherever it has a place of business. The filing must occur within three years of signing.

Legal documents come from funders’ attorneys and have to be treated seriously: response deadlines vary by state and by the type of document served. Missing one can lead to a default judgment against the business or a guarantor. Once a judgment exists - either by default (the merchant didn’t appear in court) or by confession - the funder may be able to restrain or levy your business bank account. You may be able to fight the restraining notice, levy, or judgment by filing documents with the court, but your time may be short.

A funder buying receivables, like an MCA funder, can record its purchase on file with state authorities in the same way that a lender can. This puts a lien on the purchased asset. A final settlement payment does not automatically remove it; the settlement papers must say what happens to it. If the funder gives you a final payment amount to settle, ask whether that amount will retire the account balance, liens, and judgments. Some funders will notify your customers of the UCC and tell them to pay the funder instead of you. It’s usually a bad idea to assume the notice is valid, and it’s probably a bad idea to assume it’s invalid. The best idea is to keep copies and get a lawyer to review it and advise you.

Many MCAs have a personal guarantee, which can be unconditional or “limited.” Limited means it’s good for certain acts, like closing the business or misrepresenting the receivables. The limited guarantee is also called a good guy guaranty, and it’s triggered by misconduct, while the unconditional guarantee is simply to do with non-payment of business debt. Once a settlement has been agreed on, be specific about what rights the guarantor and the business have and what rights the funder has released. Make sure the guarantor is specifically released. Also, if there’s a judgment, make sure it’s marked satisfied with the courts. You may also want to provide for dismissal of the lawsuit.

Closing the business does not necessarily end the business’s obligation to pay off the MCA or the personal guarantee. At the very least, know what’s happened to the receivables that were behind the cash advance. Also, find out whether the funder has sued the business and if so, what the court and procedural status of the lawsuit is.

Small Business Cards

Business cards have limited protections in the law compared to consumer cards. The CFPB says the 2009 CARD Act covers only consumer cards. In Regulation Z, the credit card rules set out two rules that apply to small business cards. Those rules cover card issuance and unauthorized use of cards. This means that the billing error rules do not apply.

With card debt, a tax complication may come up. If you settle a card debt for less than the balance, the balance of the debt after settlement is canceled. The card issuer generally has to report canceled debt on a Form 1099-C. The form reports canceled debt of $600 or more. Canceled business debt is generally taxable income even without a Form 1099-C. An exception applies for insolvency.

Back to MCAs: settling them becomes more complicated if you have several of them stacked up on the same revenues. You’ll need to look at everything together - the balances, daily withdrawals, guarantees, UCC filings, lawsuits, judgments. So, what to do now? Pull every agreement and read these six terms side by side. Before you stop or change MCA payments, talk to an attorney. If you’ve been served, note the response deadline right away.