How Merchant Cash Advances Work
First, it helps to understand exactly what a merchant cash advance is and how it differs from a typical small business loan.With a merchant cash advance, a company receives an upfront sum of money in exchange for a fixed percentage of future credit card and debit card sales over a defined period of time. For example, a business might get a $50,000 cash advance and agree to repay it by allowing the lender to collect 15% of daily card sales for the next 18 months.Unlike a loan, the merchant does not make fixed monthly payments. Instead, the lender takes a set percentage of daily or weekly card transactions – typically through auto-debits – until the advance has been paid back in full. The total repayment amount includes the original advance plus added fees and interest.To determine the true cost of a merchant cash advance, you have to look at the factor rate. This is the amount being charged on top of the original advance. For instance, if you receive $50,000 and have to pay back $75,000, your factor rate is 1.5. This means you’re paying $1.50 for every $1 borrowed.Factor rates of 1.2 to 1.5 are common, translating to 20% to 50% or more in equivalent annual interest. This makes merchant cash advances a very expensive form of financing.
Falling Behind on Merchant Cash Advance Payments
Because payments are taken directly from a percentage of sales, having even a few slow weeks can make it difficult to keep up with merchant cash advance payments. It’s easy to fall behind and end up in collections.If you default, the lender may hand your account over to a debt collection agency. Collectors will start contacting you demanding payment.They may also try aggressive tactics like:
- Harassing phone calls
- Threatening lawsuits or other legal action
- Freezing your bank accounts
- Putting liens on your business assets and personal property
Your Rights in Merchant Cash Advance Collections
Although merchant cash advances aren’t regulated like consumer loans, you still have certain rights when dealing with collections.
Protections Under the Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) offers some protections against harassment by third-party collectors. Collectors cannot:
- Call before 8 am or after 9 pm
- Call repeatedly with intent to annoy
- Make threats of violence or harm
- Use obscene or profane language
- Make false statements about the debt
- Misrepresent themselves as attorneys or law enforcement
- Contact you at work if asked to stop
If collectors break these rules, you can report them to the Consumer Financial Protection Bureau (CFPB) or sue them.However, these protections do not apply to first-party collectors – meaning the original merchant cash advance company collecting its own debt.
Statute of Limitations
Debt collectors have a limited window to sue for unpaid debts based on your state’s statute of limitations:
- 3 years in some states like California
- 4-6 years in many states including New York and Florida
- Up to 15 years in states like Kentucky or Rhode Island
Collectors will often threaten legal action even after the time limit has expired. Don’t let this scare you – they cannot successfully sue if the statute of limitations has passed.Of course, it’s best to handle debts before this point when possible. But knowing the time limit provides leverage when negotiating.
No Wage Garnishment
Collectors cannot garnish your wages or seize money directly from your paycheck over merchant cash advance debts.Wage garnishment is only allowed for limited types of consumer debt like taxes, child support, or federal student loans in default. It does not apply to business loans or merchant cash advances.
Bank Account Levies
While they can’t garnish wages, collectors can still freeze or levy funds from your bank accounts if they obtain a court judgment. This allows them to seize the money directly from your accounts.To levy bank accounts, the collector must first win a lawsuit against you and get a court order. You would receive notice of the lawsuit and have a right to defend yourself in court.If you do not respond to the lawsuit and a default judgment is entered, your accounts can be frozen without warning. Prevent this by taking legal action as soon as you are served.
Options When Your Merchant Cash Advance Goes to Collections
If you receive calls from a debt collector about a merchant cash advance, you have several options. Here are a few potential next steps:
Request Debt Validation
Under the FDCPA, you have the right to request debt validation within 30 days of being contacted. Collectors must provide proof that you actually owe the amount claimed.Send a certified letter demanding verification of the following:
- Original creditor name and contact info
- Total amount owed with breakdown of fees
- Payment history showing dates and amounts of any payments already made
This can help you clarify the details of the debt and identify any errors. Having this documentation is also useful if you decide to negotiate or pursue legal action.
Negotiate a Settlement
You may be able to settle your merchant cash advance debt for less than the full balance. Many collectors will accept a lump-sum payment of 40% to 60% of what’s owed.Get any settlement offer in writing before paying to protect yourself. Include language that payment releases you from any further liability. A written agreement is legally binding.Settling can allow you to resolve the debt at a discount, while avoiding the risks and costs of an ongoing legal battle.
File Bankruptcy
Filing for bankruptcy stops collections activity and legally discharges many types of business and personal debts. This can provide a fresh start if you have merchant cash advances and other debts you are unable to pay.Chapter 7 bankruptcy fully liquidates assets to pay creditors, while Chapter 11 involves restructuring debts under court supervision. Chapter 13 is an option for sole proprietors.Bankruptcy can negatively impact your business and personal credit. Make sure to understand the long-term consequences before taking this step.
Fight the Debt
Instead of settling, you may want to fight the validity of the debt through legal action. Here are some potential claims to make against the merchant cash advance company:
- Unconscionability: Argue the terms were unjustly unfair or deceptive.
- Breach of contract: Claim the company did not uphold its end of the agreement.
- Fraud: Allege the lender misled you about terms, costs, or other details.
- Usury: Interest rates and fees exceeded state limits (if applicable).
Proving these claims can get the debt invalidated or reduced. It also stops collections until the dispute is resolved.
Protect Yourself from Merchant Cash Advance Collections
Dealing with collections over a merchant cash advance default can be stressful. Don’t let collectors intimidate you into making payments you can’t afford.Take time to understand your rights and explore all your options. With the help of an attorney, you can develop a strategy to resolve the debt in a way that protects your business.The most important thing is to take action right away if you receive collection calls or notices. Delaying will only make the situation worse. Address it head on so you can move forward.With the right plan, you can settle this debt and avoid further damage to your finances and credit. Don’t struggle alone – help is available. Contact an experienced business debt relief attorney today to discuss your situation confidentially.