MCA Settlement Companies vs. Professional Business Debt Help: What Business Owners Should Know Before Signing Up
If your business is struggling with merchant cash advance (MCA) payments, you've probably already received the calls.
Someone tells you they can dramatically reduce your MCA payments. Maybe they promise to settle what you owe for a fraction of the balance. They may tell you to stop paying your funders and instead begin making one weekly payment into a "program."
When your MCA companies are taking thousands of dollars from your bank account every day or week, that can sound like exactly the solution you need.
Sometimes restructuring or settling MCA obligations is the right strategy.
But before sending thousands of dollars every week to an MCA settlement company, you should understand exactly what the company is proposing to do, where your money is going, what happens to your MCA accounts in the meantime, and who will be standing beside you if things don't go according to plan.
Those details matter.
First, Understand the Basic Settlement-Program Model
Programs vary, but many business-debt settlement programs operate on a fairly simple concept.
Instead of continuing to make the contractual payments to your MCA funders, you make a reduced weekly or monthly payment into the settlement program.
Some portion of that money may accumulate toward future settlements. Some may be used to pay the company's fees. The company then attempts to negotiate resolutions with your MCA funders.
For a business drowning in daily withdrawals, the immediate cash-flow improvement can be significant.
Suppose five MCA funders are collectively withdrawing $25,000 per week from your business.
A settlement company might propose that you stop those payments and instead pay $8,000 per week into its program.
On paper, you've just freed up $17,000 per week.
That's understandably attractive.
But there is an important question to ask:
What is happening with those five MCA funders while you're making that $8,000 weekly payment?
Your MCA Funders Aren't Necessarily Being Paid
This is one of the most important concepts for a business owner to understand.
Making payments into a settlement program does not necessarily mean your MCA funders are receiving payments.
Your business may have stopped paying them altogether while money accumulates elsewhere.
From your perspective, you're still "making the payment."
From the funder's perspective, you may simply be in default.
That distinction can have enormous consequences.
While money is accumulating toward a potential future settlement, a funder may be sending default notices, attempting ACH debits, asserting rights under a UCC filing, contacting third parties, referring the account to collections, or pursuing litigation.
A settlement company may ultimately negotiate an agreement with that funder.
But you need to understand what happens before that agreement exists.
Ask Where Your Money Goes
Before enrolling in any MCA settlement or restructuring program, ask for a clear explanation of every dollar you will pay.
If you're sending $8,000 per week, how much is:
Accumulating for future settlements?
Being paid as a fee?
Being paid to creditors immediately?
Being held in an account, and who controls that account?
Available to you if you terminate the program?
Refundable if settlements cannot be reached?
Don't settle for a sales presentation describing your "program payment."
Ask for the actual economics.
After 12 weeks of $8,000 payments, you will have paid $96,000.
You should know exactly where that $96,000 will be.
Understand How the Company Gets Paid
Fee structures matter.
A company may charge an upfront fee, recurring fee, percentage of enrolled debt, percentage of savings, settlement fee, administrative fee, or some combination of these.
None of those structures is automatically improper.
But they create different incentives and different consequences for the business.
For example, if substantial fees are collected from your earliest program payments, less money may be accumulating for actual settlements during the period when your funders may be becoming increasingly aggressive.
Ask the company to show you—in dollars, not percentages—what it expects to earn if the program works as proposed.
Then ask how much of your money is expected to reach creditors.
Who Is Actually Negotiating With the Funders?
This question is often overlooked.
The person selling you the program may be extremely knowledgeable about the sales process. That doesn't necessarily mean that person will ever speak with one of your MCA funders.
Ask:
Who will actually negotiate my accounts?
Then go further.
How much MCA experience does that person have?
How many accounts are they managing?
Does the company have established relationships with the funders involved in your case?
What happens if a funder refuses the proposed settlement?
What happens if a funder refers the matter to an attorney?
What happens if litigation begins?
A sophisticated MCA problem requires more than enrolling a business in a payment plan.
Ask Whether Anyone Has Actually Reviewed Your MCA Agreements
This is a particularly important distinction.
Your MCA agreements aren't interchangeable.
They may contain different provisions concerning reconciliation, default, personal guarantees, security interests, UCC filings, ACH authorization, receivables, venue, remedies, and other rights and obligations.
If someone recommends a settlement strategy without first understanding the agreements you're trying to settle, ask why.
A business with five MCAs doesn't simply have "$400,000 of MCA debt."
It has five separate contractual relationships, potentially involving five different sets of rights, risks, counterparties, and negotiation dynamics.
Those differences can affect strategy.
What Happens If a Funder Sues?
This may be the single most important question to ask before signing a settlement-company agreement:
What exactly will you do if one of my funders files a lawsuit?
Get a specific answer.
Will the company handle it?
Will an attorney represent you?
Is that representation included in what you're already paying?
Will you need to hire separate counsel?
Will the settlement company continue withdrawing its program payment while you're separately paying a lawyer to address the lawsuit?
Who coordinates the settlement negotiations with the litigation strategy?
There is nothing inherently wrong with a negotiation company not providing litigation services.
The problem arises when a business owner doesn't understand that limitation until a lawsuit arrives.
What About UCC Filings and Your Customers?
MCA disputes don't always remain between the merchant and the funder.
Depending on the agreement and circumstances, collection activity may affect payment processors, customers, receivables, bank accounts, or other parties connected to the business.
Ask the settlement company what happens if a funder begins asserting rights against receivables or contacting third parties.
Does the company address those issues?
Does it have the ability to analyze the underlying contractual claims?
Or does it simply continue attempting to negotiate a settlement while you handle the operational consequences?
Again, the point isn't that every settlement company must provide every service.
The point is that you should know what you're buying before the crisis occurs.
Be Skeptical of Guaranteed Outcomes
No reputable professional can know with certainty what an independent creditor will ultimately agree to.
Be cautious if someone tells you before reviewing your circumstances that your MCA balances will be reduced by a specific percentage.
There is an enormous difference between:
"We frequently resolve obligations within a particular range."
and:
"We guarantee we'll cut your debt by 60%."
Settlement outcomes depend on the funder, agreement, payment history, financial condition of the business, collectability, litigation posture, available funds, timing, and numerous other factors.
Past experience can inform expectations.
It cannot guarantee the decision another party will make in the future.
Don't Judge a Program Solely by the New Weekly Payment
This is another easy trap.
If you're currently paying $25,000 per week and someone offers you an $8,000 weekly program, it's natural to compare those two numbers.
But that's not enough.
The more useful questions are:
How much will I ultimately pay?
How long will I pay it?
How much goes to my creditors?
How much goes to fees?
What happens during the period before settlements are reached?
What risks remain outside the program?
A lower weekly payment can provide desperately needed breathing room.
But breathing room is only useful if there's a credible strategy for what happens next.
Settlement Can Be an Excellent Tool
None of this means businesses shouldn't settle MCA obligations.
Quite the opposite.
Negotiated workouts and settlements can be extremely effective tools for businesses whose existing payment structures have become unsustainable.
A successful restructuring can reduce immediate cash-flow pressure, provide predictability, resolve disputed obligations, and allow a viable business to return its attention to operations.
The question isn't whether settlement is good or bad.
The question is whether the particular strategy being proposed makes sense for your particular business and your particular agreements.
What Should Professional MCA Help Look Like?
Whether you're considering Davenport Law, another firm, or a settlement company, you should expect the people advising you to understand more than the size of your balances.
A thoughtful process should begin with understanding:
Your business and whether its underlying operations are viable
Current revenue and essential operating expenses
Every MCA agreement
Current balances and payment histories
Personal guarantees
UCC filings and claimed security interests
Existing defaults or collection activity
Pending or threatened litigation
The amount the business can realistically devote to resolving its obligations
Only then can someone intelligently evaluate what kind of restructuring strategy makes sense.
Sometimes the objective should be a settlement.
Sometimes the better result is a reduced payment arrangement.
Sometimes different funders should be handled differently.
And sometimes the numbers show that an informal workout isn't enough and the owner should discuss formal restructuring or bankruptcy options with appropriate counsel.
The strategy should follow the facts—not the other way around.
Questions to Ask Before Signing With Any MCA Settlement Company
Before enrolling, ask these questions and insist on clear answers:
Who will actually negotiate my MCA accounts?
How much direct MCA experience does that person have?
Have you reviewed each of my MCA agreements?
Exactly how are your fees calculated?
Of each payment I make, how much goes toward fees and how much toward settlements?
Where is money intended for settlements held?
Who controls that money?
What happens to my money if I leave the program?
Are my MCA funders receiving anything while funds accumulate?
What happens if a funder refuses to negotiate?
What happens if a funder files a lawsuit?
Is legal representation included, or will I need separate counsel?
What happens if a funder contacts my customers or asserts rights against receivables?
What happens if the proposed settlements cost more than originally projected?
Can you guarantee the settlement percentages you've quoted me? If so, how?
A reputable company should be comfortable answering these questions.
Why Davenport Law Approaches MCA Problems Differently
At Davenport Law, we don't believe a struggling business should be reduced to a balance sheet and a weekly program payment.
The MCA obligations are part of a larger business problem.
We want to understand why the company became dependent on short-term financing, whether the underlying business remains viable, what its actual cash flow can support, what agreements were signed, and what risks exist if payments change.
From there, we can develop a strategy for the individual funders and the business as a whole.
That distinction matters because our objective isn't simply to make this week's MCA payment smaller.
The objective is to help create a sustainable path out of the MCA cycle.
The Bottom Line
If your MCA payments have become unsustainable, getting help may be one of the most important decisions you make for your business.
But don't confuse making a payment to a settlement program with having resolved your MCA obligations.
Before signing anything, understand:
Who gets your money.
Who negotiates your accounts.
What happens while settlements are pending.
Who handles problems when they arise.
And what the entire process is expected to cost.
Then compare your options.
The right restructuring strategy should give your business more than temporary breathing room. It should provide a realistic path toward resolving the obligations that created the problem in the first place.
Considering an MCA settlement or restructuring program?
Before committing your business to a program, Davenport Law can help you understand your existing MCA obligations and evaluate the available options.
Call (214) 382-0105 or contact our team to discuss your situation.
This article provides general information and is not intended as legal advice. The rights and obligations involved in any MCA transaction depend on the applicable agreements, facts, and law.
