Merchant Cash Advances are well known to most businesses across the country over the last five to ten years as they have become an increasingly popular form of alternative lending. The pandemic may have been the cause of the surge in MCA lending given that traditional banks were unwilling to take risks on lending to small and medium sized businesses. Restaurants, contractors, health and home care clinics, gas stations, trucking companies and many other types of businesses all resorted to taking these incredibly high-interest MCA’s. A vast majority of these businesses defaulted on these MCA’s from our experience given the extremely high interest rates combined with the exorbitant daily or weekly payments that were drawn from business bank accounts. Many businesses were forced to obtain further MCA’s just to cover their original obligations. For many of these businesses, this sort of financing was doomed from the start and they were headed toward failure due to the terms of the agreement.
New York has seen a number of recent decisions in the last year alone from both the Federal and State courts including appellate courts holding that Merchant Cash Advances are Criminally Usurious loans instead of the purchase of future receivables and sham loans in the words of the courts. The general consistency of these decisions usually relies on a few factors. The reconciliation provision in the MCA contract is often the most scrutinized part of the case. The lenders almost never attempt to reconcile payments based on the businesses ongoing sales or revenue but instead focus on a fixed daily or weekly amount in our experience. The New York Attorney General won an enormous MCA case where the judge made it clear that the reconciliation provision was a sham.
There are multiple options now when dealing with Merchant Cash collection and lawsuit efforts against a business. The same defenses described above are some of the most effective that we have been able to use. It is also important for a business to be able to navigate around the use of UCC liens by MCA companies before a lawsuit is even filed. These liens can choke a business’s incoming revenue by levying incoming funds. We have been successful in filing lawsuits and motions to have these UCC liens stayed due to their use as an unlawful business practice. However, it is important to discuss the dangers of these UCC liens if a default has not occurred yet. Many of these MCA companies have a forum clause in their agreement that usually sets any litigation to take place in New York. There are some recent agreements that set Utah, Virginia, and even Florida as the jurisdiction. We have been able to have cases dismissed in other states in which the case ultimately should have been filed in New York and dismissed here in New York when the case should have been filed in the correct jurisdiction.
Although aggressively defending against Merchant cash advances is of critical importance, practical implications should be considered as well. Defending a business in lawsuit against judgment and against UCC liens protects the business and allows it to function but settlement options are always available as well. Most of the attorneys who represent Merchant Cash Advances are willing to negotiate and come to reasonable settlement terms. This may include a reasonable monthly payment term that is interest-free instead of the high interest daily or weekly payments previously made. This makes sense when handling MCA cases that are under $100,000 and especially those that are under $50,000. Merchant Cash Advance cases are complex and is a field of law that is changing quickly so it is important for a business to discuss their particular matter with an attorney that has significant experience with MCA defense matters.