Managing Vendor and Landlord Payments During MCA Debt Trouble

MCA lenders intend to enforce quickly, so you have to decide what matters more than paying them. If you want to stay open, that order looks like rent, payroll, utilities, and key vendors. The next creditor in line is most often a merchant cash advance company because their contract with you permits them to reach into your bank account directly and remove money, or even freeze the entire account. Credit card balances and unsecured loans aren’t that immediate - they don’t get seized after a couple of missed payments, and you can live with being called about that kind of money a little longer, but MCAs usually close that window within days of the first missed payment.

A merchant cash advance company is likely to be very aggressive to recover money because of how these transactions work: they buy a portion of future sales, which means they don’t care that you can’t afford to pay as the economy tanks; they don’t mind the fact that your revenue is a fraction of what it was a couple of months ago because they contractually get a set amount each day. You may not know exactly what your borrowing agreement says, but MCAs usually put confession of judgment language in the contract which lets them put it into effect right away without having to win in court. They also lock you down personally with a guarantee - if you don’t pay and the business can’t, it’s on you personally. The funder may tell customers that their payments are assigned to the funder, which means that paying your business no longer counts as paying the bill. Now it has to go to the lender directly. Equipment loans and vehicle financing can become just as urgent as a merchant cash advance in this situation.

Other creditors have to play the slow game, but they will catch up with you sooner or later. These are loans and credit card companies that need to sue you, win, get a judgment, and get an enforcement order before they can tap your bank account.

Keeping the Business Open

Focusing on the essential stuff is important because a business that closes can’t pay anyone. Unpaid funders can collect right up until the doors close, but they don’t get a dime once the store goes dark. Same goes for a line of credit from the bank or credit card balances.

Rent payments keep your doors open. If you’re considering skipping something, put rent at the top of the “must” list and call the landlord if it will be late. Renters in New York have to contend with the fourteen-day notice requirement: the landlord must serve you with a demand for rent or surrender the premises before you can be sued for not paying.

Payroll comes next. Withholdings - meaning the money you are obligated to set aside from paychecks to turn over to the government in due course - are called trust fund taxes by the IRS. The company is holding it for the IRS. Not sending the payroll taxes along causes problems far worse than credit card debt. The IRS will attach a penalty equal to 100% of the shortfall. Paying other creditors before payroll taxes looks intentional.

Many vendors can be worked with to either take smaller payments until you can catch up, or to make a new payment plan. These are ongoing relationships and tend to be handled on an individual basis, so make a list of the priority vendors with whom you’re behind and call them early to see what you can work out - and document it in an email. Get the terms of any payment plan in writing and stick to it.

If you have taken an MCA and found yourself behind, don’t take a second one in the hopes of catching up. You need a plan; taking the second MCA isn’t it. It is just more debt, more daily withdrawals, and more confession of judgment.

Most MCA borrowing contracts contain a reconciliation clause, which allows you to recalculate the payment if your business shrank significantly. Submit three months’ bank statements and credit card processing reports and a P&L for that period. Send the package of documents by certified mail and follow up by email, so you have proof you made the effort.

Reconciliation is often a sticking point, though. If your funder is giving you a hard time about reconciliation, start keeping records of your calls and emails asking for one. New York courts have held that an MCA contract containing an illusory reconciliation can be a usurious lending agreement.

An MCA contract may have a personal guarantee that lets the funder reach into your personal bank accounts. Maintaining separate business and personal accounts allows you to work in one if the other is frozen. Don’t pay personal bills out of the business, and vice versa.

Headed Toward Bankruptcy

If your business might be headed toward bankruptcy, payments made in the 90-day period before filing become subject to a preference claim by the trustee. Ordinary-course vendor payments are exempt from the rule - so you can keep paying key vendors during that 90-day window. Transfers to a single creditor totaling less than $8,575 are generally safe from recovery in bankruptcy. Supplies delivered in the 20 days before you file for bankruptcy might make the supplier a priority creditor.

Your lease doesn’t disappear because you file for bankruptcy. Rent due after you file has to be paid on time. After the case starts, you have 120 days to choose whether to keep the lease, and up to one 90-day extension to decide. Try to keep the landlord happy.

Attack the Fine Print

The MCA’s priority over other creditors is the product of the documents you signed, but those documents aren’t immune from scrutiny - and funders will often take less than full recovery if it’s easier to get done. Courts in New York have held confession-of-judgment terms in MCAs can be unenforceable in some cases. New York law since 2019 has limited what funders can do. Confessions of judgment against businesses that aren’t in New York don’t work. If the MCA contract has a reconciliation clause, and the funder refused to acknowledge it when the fact pattern showed reconciliation was necessary, that might render it void.

As owner, you can always call the lender or funder and try to get them to reduce the daily or weekly withdrawal amount. They often don’t take your request seriously. A lawyer’s involvement will go a long way to making a nonbank lender take the situation more seriously. It also offers you an opportunity to attack the fine print in the lending contracts you signed. On that basis, offers of settlement or a new payment plan are more likely to become reality.

You can do more - possibly have your contracts set aside altogether - while the game is still early, so talk to an attorney sooner rather than later. Once the judgment is filed, and your bank accounts are frozen, you will have to act much faster, while an MCA company or others will have choices you do not.