At our Firm, we increasingly handle Chapter 11 bankruptcy reorganizations for businesses and individuals arising from Merchant Cash Advances (MCAs). While MCAs are advertised and sold as convenient solutions for a business’ immediate cash flow needs, they frequently cause businesses and their owners distress. In short, while MCAs are often legally valid and enforceable, to a small business, they appear to embody predatory lending practices which exploit their need for short term cash flow.

What is a Merchant Cash Advance (MCA)?

An MCA is akin to a payday loan for businesses—a small, high-interest advance meant to provide quick working capital to keep the business operating. MCAs target small businesses that may struggle to secure traditional financing, offering a lump sum deposit into their accounts in exchange for a portion of the small business’ future sales. This structure, not classified as a traditional loan, sidesteps stringent “usury” laws. This allows MCAs to collect exorbitant interest rates often ranging from 200-400% along with hidden fees that disproportionately benefit the MCA lender.

In New Jersey, the legitimacy of these practices has come under scrutiny. Recent legal actions, such as the settlement by the New Jersey Attorney General Matthew J. Platkin with eight (8) MCA companies, underscores New Jersey’s commitment to combat misleading and abusive lending practices in the MCA industry.

Treating Merchant Cash Advances (MCAs) in Chapter 11 Bankruptcy

Many types of businesses resort to taking MCAs, from restaurants to doctor’s offices, due to a variety of reasons. Our Firm has handled Chapter 11 bankruptcy reorganizations for a range of clients who all share one (1) thing in common; their cash flow has been levied by MCA companies and their business is at risk of closure.

Luckily, Chapter 11 bankruptcy provides a path forward for these businesses. Upon filing a Chapter 11 bankruptcy, we take action to have our clients’ cash flow freed up again so that they can commence operations. MCAs are generally considered secured debts, as they have taken a security interest in a small business’ “cash collateral”. We work to obtain Bankruptcy Court approval for our clients to continue to use that “cash collateral” after the bankruptcy filing (post-petition) so that the business can reorganize.

Next we work to propose and, with approval from at least one (1) class of impaired creditors, confirm our client’s Chapter 11 plans of reorganization. Frequently, our clients’ plans have paid MCAs in full over the term of the plan, which is generally five (5) years. This scenario is effectively a win-win for all parties; our clients emerge from bankruptcy with a streamlined repayment plan, and the MCAs receive full (or at least substantial) payment over time.

Personal Liability Considerations for Business Owners

Business owners must be wary of personal guarantees commonly required by MCAs. Such guarantees can extend liability for business debts to personal assets, which remains enforceable even if the business itself reorganizes in a Chapter 11 bankruptcy. This can lead to significant personal financial exposure for the business owners themselves. However, where a Chapter 11 bankruptcy pays the MCAs in full (100%) over an extended period of time, usually over a five (5) year term of the Chapter 11 plan, payment of the business’ MCA debt in full can resolve its owners obligation.

Summary

Merchant cash advances (MCAs), while providing temporary cash flow relief, often lead to greater financial instability for small businesses in the long run. Business owners impacted by MCAs should seek experienced legal counsel to explore all available options, including the potential for reorganization through Chapter 11 bankruptcy. Our firm is equipped with the expertise to assist clients in navigating these complex scenarios, ensuring that strategic decisions are made to safeguard both business and personal financial interests.