In today’s fast-paced market, merchant cash advances (MCAs) can be a much-needed lifeline for small businesses (SMBs), supporting them via quick and flexible funding.
But there may be times when meeting MCA repayments becomes challenging.
When these financial hurdles arise, the first course of action for a merchant should always be direct and honest communication with their MCA provider.
As partners in a merchant’s long-term success, MCA providers are typically willing to work with merchants to lower their payments, offering solutions tailored to the unique needs of each SMB’s financial situation.
Unfortunately, rather than speak directly with their MCA provider, many merchants fall prey to one of industry’s most notorious predatory actors: debt settlement companies.
These companies promise to reduce MCA payments, or even eliminate them entirely.
It’s a tempting proposition, but a dangerous one.
In today’s article, we’ll take a deeper look at MCA debt settlement, to arm merchants with the knowledge they need to protect their businesses and leverage their MCA as a catalyst for growth, rather than a source of financial anxiety.
MCA: A Brief Overview
As a business owner, you’re undoubtedly familiar with the ebb and flow of the balance sheet, as well as the occasional need for additional capital.
This is where a merchant cash advance comes into play.
An MCA is not a traditional loan—it’s an advance on a business’s future revenues. MCAs can help SMBs seize growth opportunities, manage unexpected costs, or simply keep their operations running smoothly.
One of the main benefits of MCAs is flexibility—in most cases the repayment rate adjusts with your SMB’s revenue, providing relief during slower periods. MCA providers also offer competitive rates that are especially beneficial to SMBs that are considered high-risk or have limited credit history.
The funds from an MCA can also help improve your credit profile over time if you use them wisely, to pay off existing debts or make timely payments on other financial obligations, for instance.
Moreover, unlike traditional loans that require collateral, MCAs do not need any physical collateral, making them a more accessible option for many businesses.
Now that we understand what an MCA is and what its benefits are, let’s take a look at today’s topic: unlawful debt settlement.
Unlawful Debt Settlement Explained
Generally speaking, a debt settlement company is an organization that proposes to negotiate with creditors on behalf of debtors to reduce the total amount of owed debt.
In the merchant cash advance industry, these companies have developed a reputation for acting in bad faith. They exploit the financial difficulties of merchants, and they tend to leave the merchant worse off than when they found them.
The MCA debt settlement playbook goes something like this:
A debt settlement company contacts a merchant that’s struggling to meet repayment obligations, assuring them that they can effectively renegotiate their MCA contract and reduce their payments.
They often employ fear tactics, suggesting that a merchant’s MCA provider is charging exorbitant fees or using predatory lending practices. As incredible as it may sound, in many cases they go so far as to encourage a merchant to deliberately default on their repayment obligations, arguing that this will create leverage for negotiation.
The merchant, under financial stress and persuaded by the assurance of these purported experts, falls into the trap of breaching their contract, not realizing the legal and financial ramifications they might be subjecting themselves to.
The merchant will be hit with a default fee (around 30-40% of the contract balance), and the dispute will likely head to the courts. In most cases, debt settlement companies are not staffed by lawyers, and when the conversation turns “legal,” the debt settlement companies get out of Dodge.
In summary, a merchant pays fees and upfront costs to the debt settlement company and defaults on their MCA contract (and incurs a default fee)—all after failing to do the one thing they should have done: pick up the phone and talk to their MCA provider (a contractual right!).
Beyond the financial and legal consequences, merchants also run the risk of alienating themselves from industry stakeholders, as most funders avoid working with a merchant if they have previously employed debt settlement companies.
Case Study: Yellowstone’s Lawsuit
The Yellowstone Capital/Everest Business Funding case is an illuminating example of the disputes that arise from the harmful practices of unlawful debt settlement companies.
The funders filed suit against a group of debt settlement companies and ISOs (i.e., MCA brokers), after they accused them of inducing merchants to breach their MCA contracts, causing harm to both the merchants and the funders.
The details of the case are worth examining.
The ISOs, in partnership with the debt settlement companies, were allegedly offering “debt relief”—essentially a misleading code to encourage merchants to default on their existing MCA contracts, resulting in monetary gains for the debt settlement companies at the expense of the merchants and MCA funders.
The lawsuit resulted in a significant settlement, with the defendants agreeing to pay a hefty sum of $500,000 to Yellowstone Capital and Everest Business Funding. Additionally, they were prohibited from offering their services to any merchants who were clients of Yellowstone or Everest.
This case study reveals the damages that can be caused by the manipulative tactics of unlawful debt settlement companies. It also underlines the legal repercussions that these entities can face, thus serving as a deterrent to other companies that might be considering similar deceptive practices.
Here at Nexi, we have always prioritized the well-being and financial health of our merchant clients.
Our stance on the actions of deceptive debt settlement companies is firm and clear: these practices are damaging to both merchants and the greater MCA industry, and need to be addressed with utmost urgency and seriousness, together.
First and foremost, we advise all merchants to be vigilant and informed when dealing with debt settlement companies.
We stress the importance of understanding the contractual obligations that come with an MCA, and discourage merchants from breaking these agreements under the false promises of unlawful debt settlement firms.
It can’t be said enough: breaking your contract can also lead to severe legal and financial consequences.
As seen in the Yellowstone lawsuit, MCA funders can and will take legal action against fraudulent debt settlement companies that cause harm to their business. By sharing information about these firms and supporting each other, MCA funders can protect their interests and uphold the integrity of the industry.
We also firmly believe that an informed merchant is less likely to fall into the traps laid by unscrupulous debt settlement companies. As part of our commitment to this belief, we consistently strive to provide comprehensive information to our clients about their agreements, their obligations, and the potential pitfalls of engaging with debt settlement firms.
Merchants that work with us have the contractual right to reach out to us and discuss payment hardships. If they can demonstrate that they cannot make their payments, they have the right to reconcile and we will lower payments to something more manageable.
Actionable Advice for Merchants
At Nexi, we aim to equip our clients with the knowledge, tools, and support they need for long-term and sustainable success.
To help you be prepared to protect your business, we’ve compiled a few key strategies.
1. Prioritize Communication
If you’re facing difficulties to meet your MCA obligations, your best first step is to communicate with your funding provider.
It’s crucial to understand that MCAs are designed to work with the ebb and flow of your business performance. Funders like Nexi are vested in your business’s success, and may be able to adjust your repayment terms to align with your current revenue.
2. Too Good To Be True? Probably Is
Remain vigilant and skeptical about promises that sound too good to be true. Unlawful debt settlement companies may promise to reduce or eliminate your debt for a small fee.
However, it’s essential to remember that debt cannot just disappear, and frequently these promises lead to a breach of your MCA agreement, resulting in legal and financial complications. Be wary of these unrealistic propositions and always perform your due diligence before engaging with such firms.
3. Understand Your Financial Obligations
Be proactive in understanding your financial obligations.
This includes knowing the details of your MCA agreement and understanding your legal responsibilities. Transparency is a core value at Nexi, and we ensure our merchants fully comprehend their MCA terms.
After all, education is your best defense against predatory practices.
Secure Your Financial Future With Nexi
The rise of unlawful debt settlement companies is a concerning trend in the MCA industry.
These entities not only deceive merchants into harmful financial practices, but also disrupt the dynamics between merchants and funders. Merchants must be wary of such practices and always resort to direct, transparent communication with their funders.
At Nexi, our goal extends beyond providing flexible financing options like merchant cash advances—we’re committed to empowering our merchants with the knowledge they need to make informed decisions.
Our promise is to stand by your side, offering funding, but also insight, transparency, and a path towards a secure financial future.
You’re invited to connect with our team at Nexi.
Let’s discuss your financial needs and explore how we can build a sustainable partnership, tailored to propel your business forward.