The Merchant Cash Advance Industry - Case Studies And Stakeholders

The Merchant Cash Advance (“MCA”) industry, both pre- and post-pandemic, continues to thrive and grow and is a multi-billion-dollar space that provides usurious loans at interest rates with APRs in the hundreds. While merchant contracts masquerade as purchases of future receivables rather than loans at usurious interest rates, which have been upheld for the most part by the judiciary. That trend is changing as recent case decisions, primarily in New York federal and state courts, have decided that the MCA contract is, in fact, a loan at usurious interest rates. Most notably, in March 2024, the NYAG filed an action against the largest MCA company, Yellowstone, and its owners and affiliates, challenging the companies and their owners as predatory lenders. In December 2024, the case was settled by all but two Yellowstone affiliates/owners, which resulted in a judgment against the Defendants for $1.065 billion and effectively put these companies out of business. People of the State of New York v. Yellowstone Capital LLC et al., Index Number 450750/2024.

Even in light of the Yellowstone case and settlement, and other recent cases that have recognized the same change in the law as expressed in Yellowstone, for now, this multi-billion-dollar industry continues to thrive in providing last resort financing to its merchant customers whose backs are against the wall and need funding immediately. Typically, owners/operators of their companies can go online and within 24-36 hours receive financing from MCAs. The danger for the merchant in taking on this type of debt is that it becomes never-ending; that is, as I wrote five years ago for an article, borrowing from MCAs is like falling down a rabbit hole – once you take that first MCA contract the need becomes addictive and the merchant continues to take contact after contract whenever a problematic cash flow need arises. I have provided consulting services to merchants in all types of service, manufacturing, and distribution industries. I’ve had clients with as many as fifteen separate MCA contracts at a time, with total outstanding debt of as much as $9.0 million, with weekly payment obligations of $350,000. It’s hard to believe but even one of my clients was a well-regarded national CPA firm that had ten contracts with total debt of $3.3 million.

Yet, even in the face of what the merchant experiences daily following borrowing cash from MCAs, and the continual cash flow constraints that create the hardship financial situation the owner/operator is in, there are means by which the merchant can manage successfully its financial predicament and ultimately extricate itself from the predatory thumb of the MCA. Success is most often dependent on the merchant’s understanding how to deal with the MCAs, obtaining professional help to work through the dilemma, and having the merchant’s stakeholders, who are typically the merchant’s non-MCA lenders and factors, supporting the effort. The following are two case studies that reflect on how the merchant, its consulting support team, and its stakeholders can combine efforts to work through dealing with MCA debt, successfully in one instance and somewhat less successful in the other.

Case 1:-

A merchant headquartered outside of the state of New York had a factoring relationship with outstanding A/R of approx. $20 million, one of the Factor's largest credit facilities. The Factor had a senior perfected security interest in all assets of the company and, other than its A/R, the company had no other significant assets. Factor later learned that the company had six different outstanding stacked MCA loans from five different MCAs that included a total MCA debt of approximately $6.3 million. The MCAs learned that they did not have the leverage they once thought existed because of changes to the law as well as the perfected security interest of the Factor, resulting in their willingness to negotiate and settle the debt for $0.25 on the dollar. The merchant saved more than $5 million by blocking the daily debits and stretching out the timeline for nearly one year, which kept the firm in business and increased its cash flow. By the time the case was settled a year later, the company’s business had grown year-over-year in significant part because of the added cash flow with its consultant’s strategic support and the ability of the company to manage its business without the stress of the MCA payments and debt hanging over its head. The return of financial stability of the company reduced the Factor's credit risk from the stacked MCA debt and further added value to its security interest.

Case 2:-

A commercial printing company who originally had $6.8 million dollars of MCA debt, had a remaining $5.0 million balance due. The printer defaulted on its contracts because it could not pay weekly payments of $148K to the MCAs. The Factor was initially supportive of its client by providing over- advances that allowed the business to pay its MCA debt but later cut off any more over-advances to the client. The printer was on the verge of having to file bankruptcy. The printer’s consultant initially arranged with the MCAs to accept lower weekly payments that totaled less than 50% of the contract rates. However, because the printer’s constrained cash flow and the Factor’s refusal to support the temporary reduced payment structure, in less than a month’s time the printer defaulted on the reduced payment plan. The printer decided to sell its business to an industry competitor, which facilitated a payoff of the Factor, its trade creditors, and most importantly, its MCA debt, resulting in the printer, who had given a personal guaranty to its Factor and MCAs, being released from those obligations. The consultant negotiated with the MCAs to accept a total payoff of $1.8 million, which payoff was funded by providing a small cash advance funded by the Factor and an assignment of a part of the printer’s outstanding A/R. The Factor was paid as were the trade creditors, and the business was sold, and the printer released from its debt obligations. The consultant used the Factor’s senior security position to convince the MCAS that if they did not accept the deal, they would get nothing. The printer’s first choice would not have been to sell his company. However, recognizing that the alternative would have likely left him personally responsible under his PG amongst the Factor, trade creditors, and MCAs, of more than $10.0 million of debt, he made a difficult but sensible business and personal decision.

There are myriad examples of merchants and their stakeholders working together to deal successfully with MCA companies. Critical to the goal of achieving beneficial results for both merchant and stakeholder is having the clear understanding that, although far too often there are MCAs that are less than cooperative in working with the merchant to find a workable repayment plan, at the end of the day the MCA absolutely wants to be paid. So generally, even if this means extending the timeline for repayment by accepting lesser weekly payments and/or ultimately a discounted lump-sum payoff rather than engaging in litigation which the parties recognize is not cost-effective, even the most difficult MCAs will negotiate to accept a reasonable and affordable payment plan from the merchant. And if the merchant’s other stakeholders support their client, all the better.