MCA Debt Collection

MCA Debt Collection: What You Need to Know

Merchant cash advances (MCAs) can provide quick funding for businesses. But they come with risks. MCA debt collection can be aggressive. This article explains key points about MCA debt and collection practices.

What is an MCA?

An MCA gives a business cash upfront. The business repays it with a cut of future sales. MCAs aren’t loans. They’re purchases of future revenue. This lets MCA companies skirt lending laws. But it also means less protection for businesses. MCA deals often have high costs. Fees can equal 20-40% of the advance amount. Daily repayments can strain cash flow. Yet MCAs can help businesses that can’t get bank loans. The fast funding appeals to many. Still, the costs make MCAs risky for some firms.

Common MCA Collection Practices

When businesses default, MCA companies move fast to collect. They may use these tactics:

• Daily ACH withdrawals from bank accounts
• UCC liens on business assets
• Lawsuits – often in New York courts
• Judgments and asset seizures
• Personal guarantees from business owners

MCA firms say these steps protect their rights. Critics call the tactics predatory. The truth may lie between these views. Careful review of contracts is key before signing an MCA deal.

Legal Status of MCAs

Courts have upheld most MCA collection practices. They see MCAs as purchases, not loans. This means usury laws don’t apply. MCA firms can charge high rates. They can also use aggressive collection tactics.

But some courts have pushed back. A few rulings found MCAs to be loans. This could open the door to more regulation. For now, MCA companies have broad powers to collect. Businesses should know the risks before taking an advance.

Confessions of Judgment

Many MCA contracts include confessions of judgment (COJs). These let MCA firms get court judgments without notice. COJs can lead to frozen accounts and seized assets. Some states ban COJs. But New York allows them. Many MCA deals use New York law. COJs give MCA firms leverage. They can quickly get judgments if businesses default. This helps them collect. But it leaves businesses with little recourse. Some say COJs are unfair. Others argue they’re needed to protect MCA investments. The debate continues.

Defending Against MCA Collections

Businesses facing MCA debt collection have options. But they must act fast. Here are some possible defenses:

• Challenge the contract as predatory
• Argue the MCA is really a loan
• Claim fraud or misrepresentation
• Negotiate a settlement
• File for bankruptcy protection

Success rates vary for these approaches. Courts often side with MCA firms. But some businesses win relief. A lawyer can assess the best strategy. Quick action improves the odds of a good outcome.

Negotiating with MCA Companies

Some MCA firms will rework deals for struggling businesses. They may lower payments or extend terms. This can help businesses avoid default. But it often comes with fees. And not all MCA companies will negotiate.

Businesses should try talking to MCA firms early. Waiting until default leaves fewer options. Having a lawyer can help in talks. The goal is finding a workable solution for both sides. But businesses should know MCA firms hold most of the cards.

Bankruptcy and MCAs

Bankruptcy can stop MCA collections. The automatic stay halts lawsuits and asset seizures. But MCA firms often fight back. They may claim their deals aren’t loans. This could let them keep collecting. Courts have split on this issue. Some find MCAs are loans in bankruptcy. Others say they’re not. The outcome can affect a business’s options. Bankruptcy may offer relief from MCAs. But it’s not guaranteed. Careful planning with a lawyer is crucial.

Regulation of MCA Industry

MCA companies face little regulation now. But that may change. Some states are eyeing new laws. Federal agencies are also looking at MCAs. Future rules could limit collection tactics.

The MCA industry opposes new regulations. They say rules would hurt small business funding. Consumer advocates want more oversight. They argue MCAs need guardrails. The debate will shape the future of MCAs.

State-Level Actions

A few states have taken steps on MCAs. California now requires certain disclosures. New York banned some collection practices. Other states are studying the issue. But most haven’t acted yet.

State laws could change the MCA landscape. Tougher rules might make MCAs less common. Or they could make terms more favorable to businesses. For now, it’s a patchwork. Businesses must check their state’s laws.

Federal Oversight Possibilities

Federal regulators are watching MCAs. The FTC has sued some MCA firms. The CFPB is gathering data. Congress has held hearings. But no major federal action has happened yet. Some want MCAs treated like loans. This would bring more oversight. Others say hands-off is best. They argue MCAs fill a market need. The feds’ next moves could reshape the industry. But when or if that will happen remains unclear.

Alternatives to MCAs

Businesses have other funding options besides MCAs. These may offer better terms:

• SBA loans
• Business lines of credit
• Invoice factoring
• Equipment financing
• Peer-to-peer lending

Each option has pros and cons. Not all work for every business. But they’re worth exploring before an MCA. Many have lower costs and less aggressive collection practices.

Comparing Costs

MCAs often cost more than other funding. APRs can hit triple digits. This dwarfs most loan rates. But MCAs provide fast cash. And they may fund businesses others won’t. These factors can outweigh costs for some firms.

Businesses should crunch the numbers. Compare total costs across options. Factor in fees and interest. Don’t forget things like UCC filing costs. A clear picture helps make the best choice. Sometimes an MCA makes sense. Often, alternatives are better.

Eligibility Factors

MCAs have looser standards than many loans. This appeals to businesses with weak credit. Or those with little history. MCA firms focus on sales volume. They care less about credit scores. But this ease comes at a price. High costs offset the risk. And collection practices can be harsh. Businesses must weigh access against these downsides. Sometimes waiting to build credit pays off. It can open doors to better funding options.

The Future of MCA Debt Collection

The MCA industry faces crossroads. Growing scrutiny may bring changes. New rules could alter collection practices. But the industry’s future remains uncertain. Some predict tighter regulation. Others think the status quo will hold. The outcome will shape MCA debt collection. Businesses considering MCAs should watch these trends. They may affect future deals and collection risks.

Potential Industry Changes

MCA firms may evolve their practices. Some are already tweaking their models. They’re offering more flexible terms. A few are exploring hybrid products. These moves aim to head off regulation. But core MCA features will likely persist. Fast funding with few requirements appeals to many. The question is how collection practices might shift. Softer tactics could emerge. Or firms might double down on aggressive methods. Time will tell which path prevails.

Advice for Businesses

Given the uncertainties, businesses should be cautious with MCAs. Here are some tips:

• Read contracts carefully
• Understand all terms and costs
• Consider alternatives first
• Have a lawyer review before signing
• Plan for worst-case scenarios

MCAs can help some businesses. But they carry risks. Knowing these upfront is crucial. It can prevent headaches down the road. Smart planning makes MCA debt collection less likely.

MCA debt collection remains a contentious issue. The industry defends its practices. Critics call for change. Businesses caught in the middle face tough choices.

Understanding MCA collection tactics is key. It helps businesses assess the risks. Exploring alternatives is wise. But for some, MCAs fill a need. Careful consideration and planning are essential. The future may bring changes. But for now, businesses must navigate the MCA landscape as it stands.