COVID-19 and the related emergency have had a dramatic effect on small businesses. States have implemented “stay at home” orders or otherwise ordered non-essential businesses closed, resulting in virtual elimination of the business. The health response to COVID-19 poses an existential threat to small business finance companies, and Merchant Cash Advance (“MCA”) companies in particular.

In these unique circumstances, MCA companies face additional financial and legal risks. It is unlikely that an MCA contract specifically addresses a pandemic or any other emergency. However, in all MCA contracts, the merchant’s payment requirement depends on the merchant obtaining the receipts. MCA companies must honor this contingency to ensure that their contracts are not requalified as a loan. Since trading has ceased, it is unreasonable to expect traders to earn revenue now, at least if they are non-core businesses.

In these emergency circumstances, MCA Companies should take steps beyond normal reconciliation procedures to ensure that they do not require small businesses to make payments that MCA Company does not have. law. If a business is closed due to the COVID-19 emergency, an MCA business is not entitled to any payment – even if the contract requires a business to wait 30 days and then request a reconciliation. MCA companies should not treat non-payment in these circumstances as an event of default under the MCA contract.

Not processing MCA transactions properly is risky these days, especially because the FTC is focused on the industry. The FTC recently released a Staff perspective discuss his concerns in the MCA industry, including various failures to properly process transactions.

Purchases of future receivables in an emergency

The risks are not theoretical. At least one court has dealt with MCA emergency service issues, and MCA companies must apply those lessons now.

In 2016, Hurricane Matthew, a severe Category 5 storm, hit the east coast of Florida and continued to Georgia, the Carolinas and Virginia, causing death and destruction in the process. road. On October 5, 2016, Florida Governor Rick Scott declared a state of state of emergency and ordered the evacuation of certain areas, including Palm Beach County.

A Palm Beach County merchant had entered into an MCA deal with an MCA company just two weeks before the storm. The business owner claimed that when he was forced to evacuate (and shut down his business), he called a phone number listed in his contract to inform MCA that he would be shutting down his business and not would therefore generate no receipt.

Nonetheless, the MCA company reportedly continued to withdraw daily ACH payments. The company subsequently lost all of its inventory of perishable products as a result of the hurricane and closed its doors. MCA has requested a judgment by confession for the amounts allegedly due under the contract. The court ruled that the transaction was a usurious loan. The MCA contract contained an appropriate reconciliation payment allowing payment adjustment, but the court argued as follows:

“if [the MCA company] effectively recognized a risk of loss in connection with [the MCA contract], he would then recognize that the hurricane and the declared emergency could present the type of circumstances that would affect his right and ability to recover anything from [Merchant]…. Its inability to consider, let alone recognize, the possibility of not being repaid in this case, the financial arrangement cannot be considered as anything other than a loan…. “

MCA’s alleged failure to recognize the impact of unforeseen circumstances that prevented the merchant from making payments on the contract resulted in the transaction being requalified as a loan. All MCA companies should be aware that such an outcome results in the application of wear caps and, in some states, licensing requirements.

The evolving emergency circumstances arising from COVID-19 present similar problems. MCA companies must ensure that they do not receive payments to which they are not entitled; they should suspend ACH payments from merchants who no longer receive income and reduce these payments appropriately for merchants with reduced income, even if the contract does not expressly provide for these steps.

Additional Considerations for MCA Companies

MCA companies should also consider the following. First, many MCA contracts prohibit a merchant from entering into any other finance loans or contracts. In the event that the federal or state governments grant loans to traders as part of an economic stimulus package related to COVID-19, MCA companies should not consider taking these loans as an event of default. Second, the proceeds of government assistance should not be considered income for the purposes of calculating reconciliations or payments, even though the wording of a contract is likely broad enough to cover these amounts. The intention of an MCA contract is to purchase receivables, not government benefits. In the current environment, engaging in such practices risks attracting the attention of regulators and could lead to litigation alleging unfair practices on the part of MCA.


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