Beware of the Merchant Cash Advance Debt Trap!

E.J. Simonsen | Jan 18, 2019

Small businesses, like all businesses, need cash to operate. But for many small businesses, gaining access to much-needed capital is difficult – especially when COVID-19 hit. While programs such as PPP and SBA EIDL provided some assistance, businesses without an established track record of success or poor credit history have few options. Many traditional financing sources (such as banks) don’t find it worth their while to take the risk, especially if the amount required is small.

An alternative option for small business owners is a Merchant Cash Advance. They are essentially payday loans for businesses, offering cash today in exchange for tomorrow’s accounts receivables. This form of funding is not considered a loan by lawmakers, although for all practical purposes it is just that. By purchasing future receivables, lenders argue they are not technically loaning money, and therefore are able to skirt strict usury laws which limit the amount of interest that can be charged.

The distinction is important as it allows the lenders to charge much higher interest rates than normally allowed. Given their (intentionally) complex fee structure, the interest rate is difficult to calculate; but, they are the equivalent of 200-400% or higher on an annual basis.


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Merchant cash advances also come with hidden fees and nefarious provisions written to disproportionately benefit the lender. These include penalties for seeking additional loans or modifications to the payment schedule, and make the original loan that much more unaffordable. Borrowers are often so desperate to save their business, or blindly optimistic that they will be able to repay the loan, that they overlook the highly unfavorable language.

Another danger is granting authority for the lender to collect via UCC lien notices. Within days of default, lenders fire off UCC collection demands, along with a copy of the contract, directly to customers and merchant accounts. Many business owners assume that longstanding customer relationships will protect them for this type of collection. Yet, when faced with the threat of a lawsuit for failing to honor the UCC collection powers granted in the contract, most businesses either freeze the funds or simply turn them over to the lender.

While the UCC collection method is quick and effective, it is not as dangerous or deadly as the inclusion of a Confession of Judgment. Or even worse an Agreed Judgment—a waiver of sorts signed at the time the “loan” is funded, re-upped, consolidated, or modified. These judgments give the lender permission to foreclose property, seize assets, redirect income from customers, and freeze personal and business bank accounts. Sadly, borrowers often negotiate in good faith with a lender who—behind their back—has started the judgment process. Frequently, the first time a small business learns about the judgment is often when its bank account is frozen.

Merchant cash advance lenders are some of the most aggressive marketers. They proactively peddle their predatory loans to unsuspecting small business owners desperate to keep their business afloat or simply tempted by the unsolicited opportunity to grow their business with the capital injection.

If you are already caught in the merchant cash advance snare, there are options to stop lender harassment, negotiate a reduced settlement, and even regain access to frozen bank accounts. Don’t wait until it's too late—MCA lenders have aggressive attorneys on their side, so should you.

Free consultations and case reviews are available to determine the best course of action for your unique situation.

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