Navigating an MCA Lawsuit: What Business Owners Need to Know

As businesses seek alternative funding to grow and stay competitive, Merchant Cash Advances (MCAs) have emerged as a popular financing option. MCAs provide quick access to capital in exchange for a percentage of future sales, offering flexibility for companies that may not qualify for traditional loans. However, this convenience comes with its own risks, particularly the possibility of legal disputes. Business owners who find themselves entangled in an MCA lawsuit must understand the potential issues, defenses, and strategies for navigating such situations.

This article explores the common causes of MCA lawsuits, what business owners should expect, and how to approach and resolve these legal challenges effectively.

What is an MCA Lawsuit?

A Merchant Cash Advance lawsuit typically arises when a business defaults on its repayment obligations under an MCA agreement. The lender (MCA provider) may take legal action to recover the remaining balance of the advance, along with additional fees and penalties. In some cases, an MCA lawsuit can involve disputes over contract terms, accusations of fraud, or violations of state and federal regulations.

Understanding the structure of an MCA is essential to grasp why such lawsuits occur. Unlike traditional loans, MCAs are not technically considered loans but rather a sale of future receivables. The MCA provider gives the business a lump sum of cash in exchange for a portion of future sales or revenue, typically from credit card transactions. Repayment continues until the total advance, plus any fees, is fully satisfied. If the business’s cash flow slows or if the owner closes the business or files for bankruptcy, repayment issues can trigger legal disputes.

Common Causes of MCA Lawsuits

Default on Payment Obligations: The most common cause of an MCA lawsuit is the business’s failure to meet its repayment obligations. Repayments are based on daily or weekly deductions from the business’s sales. If sales slow down, the amount repaid may not be enough to cover the advance within the expected time frame, and the MCA provider may pursue legal action to recover the balance.

Confusion Over Contract Terms: MCA contracts are often complex, containing terms that may not be fully understood by business owners at the time of signing. Some business owners may believe they are receiving a traditional loan, when in fact, they are selling future receivables. Misunderstandings over terms, such as repayment rates, fees, or penalties, can lead to disputes and legal action.

Acceleration Clauses: Many MCA contracts include an acceleration clause, which allows the MCA provider to demand full payment immediately if the business violates any terms of the agreement. This could include defaulting on payments, closing the business, or failing to provide accurate financial reports. When the acceleration clause is triggered, the MCA provider can sue for the entire balance, even if the business has repaid a significant portion of the advance.

Personal Guarantees: In some cases, business owners sign personal guarantees, which make them personally liable for repaying the MCA if the business defaults. If the business is unable to make payments, the MCA provider may sue the owner directly, targeting their personal assets. This scenario is common in small businesses or startups where the business’s creditworthiness may not be sufficient to secure funding without a personal guarantee.

Defenses in an MCA Lawsuit

Business owners facing an MCA lawsuit should be aware that there are potential defenses to protect their interests. Understanding the legal landscape and working with an experienced attorney can help mitigate the impact of a lawsuit.

Usury Defense: One common defense in an MCA lawsuit is the usury  argument. Usury laws prevent lenders from charging excessive interest rates. While MCAs are technically not loans, some courts have scrutinized MCA agreements to determine if they function similarly to a loan with an unreasonably high effective interest rate. If the MCA provider’s fees and terms are found to violate state usury laws, the contract may be deemed unenforceable.

Lack of Consideration: A business owner may argue that there was a lack of consideration in the MCA contract, meaning that the terms were unfair or that they did not receive adequate benefit in exchange for the advance. This defense can be effective if the MCA provider fails to deliver on promises or misrepresents the terms of the agreement.

Improperly Structured Agreement: Some MCA providers structure their agreements in ways that may violate state laws, particularly around licensing and disclosure requirements. If the MCA provider is found to be operating without proper licensure or violating state-specific regulations, the business owner may have grounds to challenge the validity of the agreement.

How to Navigate an MCA Lawsuit

Consult an Attorney: The first step in dealing with an MCA lawsuit is to seek legal counsel from an attorney experienced in business finance and contract law. An attorney can help you understand the specific terms of the MCA agreement and evaluate potential defenses. They will also represent your interests in court or settlement negotiations.

Review the Contract Carefully: It is crucial to thoroughly review the MCA contract, paying close attention to the terms around repayment, fees, acceleration clauses, and personal guarantees. Identifying any inconsistencies or unfair terms may provide leverage in negotiating a settlement or fighting the lawsuit.

Gather Financial Records: Accurate and detailed financial records are vital when defending against an MCA lawsuit. This includes documentation of all credit card transactions, sales, and communications with the MCA provider. Your attorney will use these records to demonstrate your financial situation and the business’s ability to repay the advance.

Negotiate a Settlement: In many cases, business owners can negotiate a settlement with the MCA provider to avoid a lengthy and costly court battle. A settlement may involve restructuring the repayment terms, reducing penalties, or agreeing to a lump-sum payment to resolve the lawsuit. Your attorney can help facilitate these negotiations.

Conclusion

Facing an MCA lawsuit can be a stressful and complex challenge for business owners. Understanding the causes of these lawsuits, available defenses, and the steps to navigate the legal process can make a significant difference in the outcome. By working with experienced legal counsel, reviewing contracts carefully, and negotiating where possible, business owners can protect their interests and avoid further legal entanglements. While MCAs provide a quick funding solution, being aware of the risks and potential legal consequences is essential for long-term business success.