Merchant Credit Advances - Borrower Beware


Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.


Most businesses earn a portion of their revenues from credit card sales—often a significant portion. Many times during the business’ existence, an owner needs additional financing to carry on business operations. The business might be seasonal, and subject to roller coaster revenues, (wedding related businesses or tourist area hospitality concerns for example), or new competition might cause a need for financing to market and upgrade the business operations.

Some businesses, that cannot qualify or obtain funding from traditional sources like a bank, opt to use their credit card sales as a vehicle to obtain needed funds, without having to deal with banks and their strict underwriting requirements, and at times, without that business even being profitable.

Enter the Merchant Credit Advance, a form of funding wherein a lump sum advance is given to the business, in exchange for receiving a percentage of credit card sales until a significantly higher number than that advanced, is returned to the MCA provider.

Right here, I want to advise the reader of this post that this, in many cases, is absolutely the worst type of financing you can obtain, (short of dealing with a loan shark), and if you have available any alternative means of financing, use it.

But depending upon the circumstances of your business reality, MCA funding might be the only alternative, despite the risks involved. The turnaround time for receiving funds is usually very fast, and you don’t have to have A-1 credit. You just have to have enough credit card sales to satisfy the underwriting requirements of the MCA funding company.

During the process of obtaining an MCA funding, the funder will look at the amount of your credit sales to determine whether or not it is likely you will be able to make the payment percentages from your credit card receipts, and still be around long enough to make the final payment due the funder.

The greater the percentage the funder can take from your receipts, the less the total amount due can be. (Emphasis on the word can). Remember, as this payback is based on a fixed percentage of sales, the more you make, the more the funder receives, and the less you earn the less the funder receives from your credit card sales. (Sometimes, depending upon contract terms, these percentages can be adjusted).

It is very important for the merchant to remember, that usually, these fund advances are not legally loans. If the advance contract is worded right, they will not be considered loans, and the criminal usury statute (25% currently in New York), will not apply.

Which means the MCA provider can, and usually does charge a “rate factor” well in excess of what would be otherwise criminal usury interest if this were a loan. For example if you are advanced $50,000.00 and had to pay back $63,000.00 from your receipts, even though were it a loan you would have criminal usury; because it isn’t, you don’t, and the MCA funder can get away with charging something like this.

Some MCA advances can have an “interest” rate of 150%, except, it isn’t legally interest. As this arrangement is not a loan, a credit inquiry will not show up on your credit report, but neither will successful repayment be entered as a favorable item on the report.

The MCA contract is usually highly detailed in small print. It contains terms that the average merchant will have a difficult time understanding fully, without consulting with counsel familiar with these types of arrangements.

There may be personal guarantees, confessions of judgment (which the funder can file against a defaulting merchant without a lawsuit being instituted), and other very dangerous provisions in these agreements.

This is why it is crucial to obtain a review of the agreement by knowledgeable counsel before signing any MCA funding agreement. Because a merchant goes the MCA route to obtain quick financing, it is wise that he more quickly gets to an attorney for contract review prior to signing.

Be aware that both in the Federal and State courts of New York, these MCA funding agreements (provided they are properly worded) have held up as being legal and not being subject to any usury laws, because they are not loans, and the monies paid back are not deemed to contain interest.

So, if you choose to go it on your own, and sign an MCA funding agreement without having it reviewed first by counsel, you can wind up with some nasty financial and legal surprises if for any reason your business cannot afford to pay back the amount due the funder.

Let’s say for some reason, you have obtained an advanced MCA funding, and you cannot meet with its terms. Is there any way you can use a usury defense to fight the action, or is there any way you can vacate a judgment entered by reason of the confession of judgment you may have signed in order to obtain the funding?

Here is our usual truthful answer: it depends.

In a March 2018 decision from the First Department Appellate Division, (which is a direct precedent case for the courts of Manhattan and the Bronx), it was determined that the confession of judgment obtained and filed against the merchant was not subject to being vacated by reason of a defense of criminal usury.

In other words, the judgment was good, and enforceable against the merchant. Unlike a loan, which is absolutely due and payable according to its contract terms, the MCA advance is only collected from credit card receipts. No receipts, no collections.

However, it has been held where certain provisions in the MCA agreement are absent, (“without recourse” provisions, unlimited personal guarantees, due dates, late fee provisions, for example), there just might be a loan agreement which is subject to a criminal usury defense.

The takeaway is this, if you are facing a situation where you cannot comply with a merchant cash advance agreement you signed, if you are either facing litigation, or have already had filed against you a judgment by confession, you absolutely need to contact competent counsel to see if you have any chance of getting out from under a judgment, or have a valid defense to litigation.