The Lawyer James has worked on dozens if not more than 100 MCA attorney New York cases, and from that experience, has gained a few key takeaways that are helpful for businesses and individual guarantors who have been involved with merchant cash advance financing arrangements.
Before that, let’s make sure we are on the same page about what an MCA transaction actually is. You probably already know this, but “MCA” stands for “Merchant Cash Advance.” A merchant is typically a business. And cash advance is just that: an advance of cash. So a merchant cash advance is an advance of cash to a business.
In my opinion, these are disguised loans. However, New York law seems to think these MCA financing transactions are not loans, but rather, receivables purchase agreements. What’s the difference? Loans are very simple transactions: lender gives borrower money, and borrower pays back the money over time or in a lump sum. On the other hand, receivables purchase agreements are apparently not loans, and instead are where a financing company buys an income stream, or receivables. But, you probably do not need an MCA attorney New York to tell you that.
Here’s where the distinction begins, but for reasons I will get into a little later, these are distinctions without differences when it comes to categorizing the transactions as receivables purchase and not loans, because of one simple thing: the personal guaranty. That throws off the entire analysis and makes it a disguised loan and nothing more. This in my opinion is a very basic proposition,
In a true receivables purchase, the financing company, as aforesaid, buys an income stream. The best way an MCA attorney New York like me can explain this is with an example. This means that if a company is owed $100, the “receivable,” but is not immediately paid the receivable, then it goes on their books as a receivable. However, that receivable is not cash in the bank, and the company cannot use it as cash, the company can not pay its employees with a receivable, and cannot pay for raw materials or utilities or any other product or service that the business uses in exchange for money, for the most part. So to generate immediate, usable cash, the company (the “merchant”) sells the receivable to an MCA financing company for cash, or, in the terms used above, a cash advance.
However, the MCA financing company does not buy the receivable for nothing; more precisely, it does not buy the receivable for even money, because it needs to make a profit. This is not information or knowledge that is exclusive to being an MCA attorney New York. It just makers business sense; if you buy something in the future for $100 and then in the future have something that’s worth $100, you have not made any money and you have no profit. So, and to be clear, this is for example and for illustrative purposes only, what an MCA financing company does to make a profit is it buys the $100 receivable for say $75 dollars, and the profit is therefore $25 (excluding of course and not accounting for other costs of doing business). To repeat, or to say it another way, the business in need of cash, here, that’s the merchant, sells a $100 receivable that it expects in the future, to an MCA financing company that it sells for $75 today.
Now, why would a merchant do that? The main reason is cash flow. It needs the cash now and cannot wait another 30 or 60 or 90 or even sometimes 120 days for the cash because the business needs it now.
Mechanically, continuing our example above, the way it works is that the MCA financing company pays the merchant $75 immediately for the receivable. Then, once the receivable comes in, it goes directly to the MCA financing company. I don’t know if an MCA attorney New York drafts these documents, but I would imagine so, because they are stacked against the merchant and are wildly in favor of the MCA financing companies.
This brings up another interesting point: most MCA financing companies do daily or weekly debits, and it raises the question as to they are getting paid on account of the receivables they purchased, or on account of receivables that they did not purchase. This is one of the things we will need to investigate on a case by case and merchant by merchant basis.
Now, as I said before, the thing that makes these disguised loans and not pure receivables purchases is the fact that there is a personal guaranty. This is because it changes the risk profile of the financing transaction. In a receivables purchase transaction, the financing company takes the risk that the receivables do not come in, and if they do not come in, the MCA financing company does not get paid, at least in theory that is the way that this happens. However, even if there are no receivables or even if no receivables come in, and the merchant closes its business, there is typically a personal guaranty that the MCA financing company requires as part of the transition. And if there’s a default, the MCA financing company typically sues the personal guarantor for the amount of the receivables it purchased, not the amount advanced. So, using our example above, this means that the merchant would receive $75, and if the $100 receivable never comes in and the merchant closes its business, the guarantor is personally on the hook to repay the $100.
MCA financing companies justify this because they say it’s a “performance guaranty.” As an MCA attorney New York, The Lawyer James takes a high level approach at looks beyond the labels given to the documents, and instead looks at the nature of the transaction. Here, because the obligation to repay does not end with the receivable, the type of transaction described above is a disguised loan and not a true receivables purchase.
There is much more to say on this topic and there are dozens of these cases filed monthly or not weekly or daily in the New York court system and presumably in other jurisdictions as well. We are here to help.