Traditional financing is not always available to many small business owners. Many turn to merchant cash advance funders to satisfy short term capital needs. Business owners have a business lawyer review the terms of these complex agreements because the consequences of breaching them can be very severe. This New York and New Jersey business lawyer blog post reviews 5 critical components of merchant cash advances (a.k.a. receipts purchase agreements).
1. A Merchant Cash Advance is Not Your Typical Loan
Unlike a traditional loan, a merchant cash advance gives the merchant money at signing in exchange for a right to be repaid a percentage of the business’ future cash receipts. The total amount of receipts is normally much more than the funds received. This leads most business owners to feel that the agreement should not be enforced because they are paying an illegal amount of interest (a.k.a. “usury”).
2. The Funder Deducts Funds Directly from Your Bank Account
Unlike a traditional loan, a merchant cash advance is not paid back voluntarily through monthly payments that the borrower initiates. Instead, the funder is given access to your bank account and directly withdraws money from the account on a daily basis until the agreed upon receipt total is repaid.
3. There Are Serious Consequences to Blocking The Funder’s Ability to Withdraw
The daily withdrawals often prove to be too much. That leads many merchants to revoke the funder’s access to their accounts. If doing so is a breach under the contract, the funder can tack on exorbitant default fees, seize certain assets of the business, and get reimbursed for their attorneys’ fees. Therefore, should consult with a business lawyer to understand your rights before blocking the funders’ access as most are required to try to work with you to find a solution that better suits your repayment needs.
4. The Business Owner Personally Guaranties the Debt of the Business
Business owners create corporate entities (albeit a corporation, limited liability company, etc.) to avoid personal liability. However, most merchant cash advances require the owner to personally guaranty the debt. That’s why the funder will sue the business and its owner in the event of breach of contract.
5. Work With a Business Lawyer to Avoid Unnecessary Litigation
Funders usually sue borrowers in the event of a breach of contract. But many reputable funders are still willing to work with you to find a mutually beneficial compromise that allows the lawsuit to be dismissed. Given how complex these agreements care, you should not go at it alone. Borrowers represented by counsel are more likely to know their rights and not made unnecessary concessions. Be sure to consult with a reputable business lawyer to advocate for your best interests.