Medical Practices With MCA Debt: 7 Considerations Before You Miss a Payment

For a medical practice, missing a merchant cash advance payment can trigger a cascade of undesirable consequences. If you miss a payment on a merchant cash advance and your merchant advance funder is not “quick to come after you,” that does not mean that the creditor is not going to attempt to collect. Still, there are options available to you if you cannot make your next payment. Once you know about the nuances of a merchant cash advance and your rights when trying to modify terms, fix issues, or potentially settle a merchant cash advance, you can make a more informed and better decision, and hopefully avoid disaster.

Knowing the Contract Terms

First, you should always read the fine print of your MCA agreement so you know what you have to do to avoid defaulting in the future, and so that you can potentially use the MCA’s own terms against the merchant cash advance funder to put yourself in a better position. You may be required to make automatic payments from a business bank account through automatic clearing house (ACH) withdrawals. Other agreements take a percentage of card receipts instead. The merchant cash advance agreement may contain a Confession of Judgment, personal guarantee, and other terms, such as a UCC filing. Therefore, it is extremely important that you understand what your contract says about default, late payments, and the repercussions of such events. Knowing the contract terms can help you prepare for these outcomes before they occur and can help you successfully mitigate the risks involved.

Contract terms aside, the medical services industry is different from other industries. It is distinguished by the fact that there are outside parties, such as HMOs and Medicare, that pay for services rendered. Insurance receivables are different than other assets. Under federal rules, apart from narrow exceptions such as a court order, Medicare receivables are to go directly to the medical care provider. The cash advance funder may be attempting to leverage your company’s payments for insurance and Medicare receivables in order to collect debts, but it may not be able to do so directly. As such, you should know whether or not your insurance and medicare receivables may be protected. And regardless of what your merchant cash advance funder attempts to tell you, it may be important to consult with an attorney who is familiar with your rights as a medical practice.

If a merchant cash advance funder has ACH withdrawal capability, it can, in theory, withdraw money from your business bank account until your MCA debt is fully repaid. Unfortunately, the agreement may permit withdrawal even after default or a late payment. Cutting off the merchant cash advance funder’s ability to debit your bank account may not prevent other forms of collection. It may be entitled to follow other terms of the MCA agreement, including the Confession of Judgment, UCC-1 filing, and it may be able to demand payment in full. If you are considering the possibility of closing your account, you should first consult with an attorney.

A confession of judgment is a contract term, and, if used, can be valuable to the merchant cash advance provider. But Confessions of Judgment are more difficult to use in New York. New York enacted a law in 2019 that only allows a private creditor to file a confession of judgment against a debtor who lived in the relevant county at the time the debt was signed or who resides there at the time of filing. That could affect a funder who obtained a New York MCA online from a merchant whose business is based elsewhere. So obtain advice before assuming that a Confession of Judgment is effective.

Negotiating to Restructure or Even Settle the Debt

It might be possible to slow down, restructure or settle an MCA, through negotiations with the funder. Restructuring involves an agreement to restructure repayment terms, for example, in relation to late or missed payments. A settlement, on the other hand, involves an agreement to pay a certain, lower, amount and be credited as having paid off the entire obligation. Payment can be spread out over time. If your agreement with the merchant cash advance provider contains a reconciliation clause, it is essential that you review this clause to better understand if there are any requirements that have to be satisfied. The clause may require you to provide certain information to the funder, like updated bank statements and monthly sales volumes, so that the funder can calculate the amount due.

In many instances, the only thing that a merchant cash advance company actually cares about is receiving payment on the debt that it is owed. Because the merchant cash advance funder does not wish to lose money, it is not necessarily to its benefit to force you to close your business, declare bankruptcy, or otherwise fall into insolvency, thereby compromising or reducing its own ability to collect. That could potentially give you leverage in negotiating to restructure or even settle the debt for less than what you owe. You have no guarantee that the merchant cash advance company will accept a settlement or restructuring, but it may be worth investigating. The funder may be willing to accept less, and to wait for payments in installments, or to offer some other form of compromise. Also, there is not one rule or formula that applies to all restructurings and settlements, and each MCA funder may have different criteria for each category. But the underlying principles are that you should be prepared to set up a payment plan that sets up the chances for the MCA funder to collect a sizable portion of the debt, within a reasonable time.

To settle or restructure a debt, you will want to be prepared to provide updated information about your monthly sales volume, bank statements, and other financial details. When negotiating a settlement, have all information necessary to demonstrate the financial condition of the business in a complete and organized manner, and take it one step at a time. Where more than one funder is involved, you should consider whether it is possible to manage multiple negotiations with multiple creditors who may differ in their approach and in the amounts they are willing to accept.

In some instances, bankruptcy might be an option worth exploring. Depending on your situation and financial picture, bankruptcy could provide a way to pause creditor action. That said, it is important to consult with an attorney to better understand your rights and obligations before making the decision to file bankruptcy.

Written Agreement

If a funder says it agrees to your proposed terms, you should make sure it is willing to sign a written agreement reflecting your terms. Without a written agreement, there is a chance that the funder could change its mind. When negotiating restructuring or settlements, put all agreed-upon terms in writing, signed by all necessary parties, before making any payment, and obtain a written release. A well drafted agreement should also clarify when and how you will pay, and the means you will use. A release is an essential document to confirm that all parties are satisfied and that the restructuring or settlement is completed. It should expressly refer to the merchant cash advance agreement and make clear that it releases you, the guarantor, and the business from any claims arising from the contract. Pay particular attention to what the funder says you have to do in order to obtain the release. After making payments on a settlement, you want to make sure the MCA funder files any appropriate documents or letters with the court, and that any UCC filing is terminated.

Settling a debt for less than the total amount due might help your company and give you relief. Forgiven debt could still have tax consequences, though. You should therefore consult with a tax accountant to understand potential issues.

Every situation and agreement is unique. Therefore, the process of restructuring or settling an MCA can vary. Depending on your situation, and the amount you are trying to settle and restructure, it could take several weeks, or even a few months, to negotiate the restructuring or settlement. When negotiating a settlement or restructuring, it helps to start early. It is important to seek professional advice from professionals knowledgeable about your industry and who can advise you on best options based on your situation.