MCA Collections

MCA Collections: Understanding Your Rights and Options

Merchant cash advances (MCAs) can be a lifeline for small businesses needing quick capital. But they come with risks. Many find themselves overwhelmed by aggressive MCA collections. This article examines MCA collection practices – both legal and questionable. We’ll explore your rights as a borrower and options if you’re struggling to repay.

What is an MCA?

An MCA is not a loan. It’s an advance on future credit card sales. The MCA provider gives you a lump sum upfront. In return, you agree to repay through a percentage of daily credit card receipts. This can seem attractive to businesses with uneven cash flow. But high fees and daily repayments can strain finances. Some argue MCAs fill a needed gap in small business funding. Critics claim predatory practices trap vulnerable companies in cycles of debt.

Common MCA Collection Tactics

When borrowers fall behind, MCA companies often use aggressive collection methods. Daily automatic debits from your account are standard. This ensures the MCA gets paid before other expenses. Some providers file Confessions of Judgment (COJs) to quickly seize assets. Others may contact your customers directly. These tactics can devastate a struggling business. Yet providers argue they’re necessary to mitigate risk in high-default industries.

Automatic Debits

Most MCAs require access to your bank account for daily repayments. This gives them first claim on incoming cash. It can leave you short on funds for payroll or rent. You may be able to revoke ACH authorization. But this often triggers aggressive collections. Some say automatic debits protect both parties. Others view it as overreach into business operations.

Confessions of Judgment

Many MCA contracts include a COJ clause. This allows the provider to file a judgment without notifying you. They can then freeze accounts or seize assets. COJs let MCA companies act swiftly to recoup losses. But they leave borrowers with little recourse to dispute claims. Some states have banned or restricted COJs in response. The MCA industry claims they’re vital for managing risk. Consumer advocates say they’re fundamentally unfair.

UCC Liens

MCA providers often file UCC liens on business assets. This secures their position as a creditor. It can make it hard to get additional financing. The lien may remain even after repaying the advance. Providers say this protects their investment. Critics argue it’s overreaching for a short-term advance. Be sure to request lien removal once the MCA is repaid.

Customer Outreach

Some MCA companies contact customers directly to redirect payments. This can damage business relationships. It may violate your contract terms. Providers claim it’s a last resort to recoup funds. But it can feel like harassment to merchants. Consider addressing this possibility in your initial contract.

Your Rights as an MCA Borrower

MCA borrowers have fewer protections than traditional loan recipients. But you still have rights. Familiarize yourself with federal and state regulations. The FTC prohibits unfair or deceptive practices in collections. Some states cap interest rates or restrict COJs. Know your contract terms. Keep detailed records of all communications. Don’t hesitate to pushback against violations.

Fair Debt Collection Practices Act (FDCPA)

The FDCPA restricts abusive collection tactics for consumer debts. It may not apply directly to MCAs. But it sets standards for acceptable practices. Collectors can’t use unfair, deceptive or abusive methods. They can’t contact you at inconvenient times. Excessive calls or threats violate the FDCPA. You can request debt validation and dispute inaccuracies. Some states have expanded these protections to business debts.

State Regulations

Some states have enacted laws specifically addressing MCAs. New York requires registration and disclosure. California caps interest rates on similar products. Check your state’s laws on lending and collections. You may have more rights than you realize. But MCA providers often use choice-of-law clauses. This can make it tricky to apply state protections.

Contract Terms

Your MCA agreement dictates many of your rights. Read it carefully before signing. Pay attention to default clauses and collection terms. Some contracts allow modifications without notice. Others have mandatory arbitration. Understand what you’re agreeing to upfront. Don’t be afraid to negotiate terms. The contract may limit your options later.

Options if You Can’t Repay

If you’re struggling with MCA payments, act quickly. Ignoring the problem will only make it worse. Communicate with your provider. Many are willing to work out arrangements. Consider refinancing or consolidation. In severe cases, bankruptcy may be an option. Each path has pros and cons. Consult a financial advisor or attorney to assess your situation.

Negotiating with the MCA Provider

Reach out to your MCA company proactively. Explain your financial situation honestly. They may offer temporary reductions or payment plans. Some will settle for a lump sum less than the full balance. Document all agreements in writing. Be wary of verbal promises. Providers prefer to work with you rather than pursue collections. But they need to see good faith efforts on your part.

Refinancing or Consolidation

You may be able to refinance your MCA with a traditional loan. This can lower payments and extend terms. Some companies specialize in MCA consolidation. They may offer better rates than your current advance. But beware of scams promising easy fixes. Do your due diligence on any new lender. Ensure you’re not trading one problem for another.

Bankruptcy

In extreme cases, bankruptcy may be your best option. Chapter 11 allows businesses to restructure debts. Chapter 7 liquidates assets to repay creditors. Bankruptcy can halt collections and judgments. It gives you breathing room to reorganize. But it has long-lasting consequences. It should be a last resort after exploring other options. Consult a bankruptcy attorney to understand the implications.

Protecting Your Business from Predatory MCAs

Prevention is the best defense against MCA problems. Carefully evaluate any advance offers. Understand the true cost of funding. Consider alternatives like traditional loans or lines of credit. If you do use an MCA, negotiate favorable terms. Have a lawyer review the contract. Plan for repayment from the start. Don’t take on more than you can realistically handle.

Evaluating MCA Offers

Compare multiple providers before choosing an MCA. Look beyond just the advance amount. Calculate the effective APR including all fees. Check reviews and complaints about the company. Be wary of high-pressure sales tactics. A reputable provider will answer all your questions. They should clearly explain all terms and costs. Don’t rush into an agreement you don’t fully understand.

Negotiating Terms

Many MCA terms are negotiable. Push for a lower factor rate or longer repayment period. Try to remove or limit personal guarantees. Negotiate caps on daily payment percentages. Ask for flexibility in case of slow seasons. Get all modifications in writing as part of the contract. Be prepared to walk away if terms are unfavorable.

Planning for Repayment

Before accepting an MCA, create a realistic repayment plan. Project your cash flow including the daily deductions. Ensure you can cover other essential expenses. Build in a buffer for unexpected downturns. Consider seasonal fluctuations in your business. Have a backup plan if sales don’t meet projections. Don’t count on being able to renew or refinance. Treat the MCA as a short-term solution, not ongoing financing.

The Future of MCA Regulation

The MCA industry faces increasing scrutiny. More states are enacting specific regulations. Federal agencies are paying closer attention. Some call for MCAs to be treated as loans. This would subject them to usury laws and disclosure requirements. The industry argues this would restrict access to capital. They say MCAs serve businesses that can’t get traditional loans. But horror stories of crippling debt fuel calls for reform.

As debates continue, stay informed about your rights. Be cautious when considering an MCA. Understand the risks as well as potential benefits. With careful planning, MCAs can provide needed capital. But they can also lead to financial ruin if misused. Weigh all your options before committing to an advance.