If you have a business, you have no doubt received advertisements for “merchant cash advances,” “merchant loans” or “merchant financing,” whether or not those specific terms are used. If in doubt, just do a search for those terms and you will get a couple pages of sponsored ads (but be warned the big brother of the internet will flood you with ads after that). Based on cases I have now, and calls I have received, business has picked up considerably for those lenders post-covid. Although you might be tempted by the relatively easy cash promised as soon as the next business day, you might fall into a trap you cannot easily escape.
Initially, let’s review the setup. You find “ABC Finance” online, through a google search or an advertisement, promising your company immediate financing and a quick, easy approval process. ABC asks you for basic information about your business, and a list of your accounts receivable, including the names of your customers, and you complete the short online application. Great news! Your financing is approved and all you need to do is sign the documents, provide your bank account information, and your money will be wired the next day!
Now let’s review the actual deal, using a real world example from my files for a business that has $100,000.00 in receivables (click the images for a larger version). The main document you sign is titled a “Purchase Agreement” and you have agreed to sell that $100,000.00 of receivables to ABC for a purchase price of $75,000.00, which they will wire to you. However, in reality, it is not a sale because you have agreed to pay ABC back the $100,000.00 (not the $75,000.00), plus a long list of various fees. In this example, you agree to pay ABC $639.20 per day through automatic drafts from your business bank account. If all goes well, you repay the “loan” in 7-8 months, with an effective annual interest rate of 75-100%. As you get close to the payoff date, ABC will probably be happy to make a new deal for the same receivables or give you more money. After all, they have almost doubled their money already.
If you are not able to make those daily payments — every single business day — the situation can go downhill very quickly. At best, if you make up those “bounced” payments they will come with hefty fees from ABC and your bank for every daily payment missed. If you cannot make these payments up, ABC might drain your bank account because you gave them a security interest in your accounts and perhaps other business property. More importantly, you will review your files and realize that not only did you sign a personal guaranty for the “loan” you also signed a consent judgment or “confession of judgment.” That means that ABC can get a judgment against you personally and your company for the loan balance and hefty legal fees merely by filing the consent judgment with the court (often a New York court). You have lost a lawsuit in a distant court even before you know you have been sued. In some cases ABC might even contact your credit card merchant and all of the customers you told them about and threaten them with legal action if they do not send the receivables to ABC, effectively shutting down your business. In a flash, your personal and business finances are in shambles.
Even if the merchant debt is your only significant debt (which is not uncommon) it can kill your business if you just go through a slow period or your bank account balance just happens to be low for a few days. You should consider carefully the real cost of this financing and the consequences described above before you enter into this relationship. If you are already in this situation, contact a qualified lawyer to discuss how it may be resolved and your business saved.
Scott Riddle’s practice focuses on bankruptcy and reorganization for businesses and business owners. Scott has represented businesses and other parties in Bankruptcy and reorganization cases for almost 30 years. You can contact Scott at 404-815-0164 or firstname.lastname@example.org. For more information, click here.