How to Protect yourself during a Merchant Cash Advance Loan Default
Recently Second Wind Consultants has seen a large influx of business owners overburdened with merchant cash advance loans and other forms of high-interest short term financing. Instead of one large monthly payment, these multiple, often daily, payments are strangling cash flow of an otherwise “stable” business. We have well-received articles on Defaulting on a Merchant Cash Advance Loan that have been well-received.
The most common profile is a small business that has obtained one short-term advance, only to need additional financing to keep up with difficult terms of their previously acquired merchant cash advances. In the industry, this is known as “stacking” and is typically a death wish for many businesses. However, desperate business owners continue this process, hoping to “turn the corner” toward profitability until they finally are no longer reliant on these advances.
But that day never comes. Now they are stuck with a half dozen high-interest loans and they are failing to make the agreed payments. What to do?
First, request a consultation with us to discuss your options. Next, read below some strategies we use for protecting your business and eventually settling those debts.
Defaulting on merchant cash advance payments is a scary position for any business owner to be in, but having multiple creditors attempting to collect on the same assets can be turned into an advantage. To understand that advantage, first, you have to understand how collateral like business assets are secured.
To secure a loan against business assets, a creditor can obtain a security agreement with is perfected through a UCC-1 (Uniform Commercial Code) filing. Much like a lien filing on the deed of real estate property (mortgage), UCC-1 filings are used to determine who has a priority security interest in your business assets.
In a situation where multiple creditors have placed UCC-1 filings against the assets of a single entity, the UCC filings are given priority chronologically, “first to file” so to speak. If the first position creditor does not receive 100% repayment of their loan balance, the second position creditor receives no payment, making any security interest beyond the recoverable value of the assets useless. So if your business assets are worth $50,000 and you owe your first position creditor $100,000, then there is no equity in your assets for anyone else beyond the first lien holder.
Now let’s apply all this to your merchant cash advance loan workout. Many clients we see currently have three to as many as ten merchant cash advance loans on their business! Some of those lenders file UCC-1s, others do not. In the agreements, almost all the merchant cash advance lenders claim to have purchased the rights to a certain percentage of your future revenue. But of course, they cannot all have the first right to it..
So, let’s pretend you make an arrangement with your first position secured lender to make reduced payments to them and eventually get on track. All the other creditors need to just stand by idly right?
Not exactly, but it reduces their motivation to come after your business if there is no equity in your business assets and it puts you in a better negotiating position. We use this strategy to satisfy the first lien holder since they are the biggest threat to your company. Then we make other arrangements with the other junior creditors knowing full well they are in a very weak position.
In conclusion, if you can work an arrangement with your primary creditor, they can act as a shield to delay any action taken by lower position creditors and prolong the life of your business.