Merchant Cash Advance UCC Liens: The Ugly Truth About Going Out of Business
What Even Is a Merchant Cash Advance?
So let’s start with the basics – a merchant cash advance is basically a type of loan that businesses can get; but instead of paying it back through typical monthly payments, you pay it back through your future sales.Sounds pretty straightforward, right? Well, here’s where things get a little messy…These merchant cash advance companies don’t actually call it a “loan” – they call it a “purchase and sale agreement.” Why’s that? Because if they called it a loan, they’d have to follow all those pesky lending laws and regulations.By calling it a purchase agreement instead, they can slap on crazy high interest rates and fees that would never fly for a normal loan. We’re talking effective annual interest rates of like 70% or higher sometimes!But businesses sign up for these merchant cash advances anyway because they’re easy to get approved for – the companies don’t really care about your credit score or financials as much as a bank would for a loan.
The Dreaded Confession of Judgment
Here’s where the real fun begins though – when you get one of these merchant cash advances, you usually have to sign what’s called a “confession of judgment.”Basically, you’re confessing upfront that if you miss payments or default on the advance, the company can immediately get a judgment against you in court without you even having a chance to defend yourself. Crazy, right?It gets worse too – that judgment also allows them to file a UCC lien against your business assets and potentially seize them to pay back what you owe.A UCC lien (which stands for Uniform Commercial Code by the way) is kind of like a property lien, except it’s on your business assets instead of real estate. So we’re talking equipment, inventory, accounts receivable – anything that cash advance company decides is fair game.
What Happens If You Go Out of Business?
Okay, so let’s say despite your best efforts, your business ends up shutting down. You’d think at that point, you’re off the hook for that merchant cash advance debt, right?Think again, my friend. Thanks to that lovely confession of judgment you signed, the cash advance company can still come after you personally for whatever is left that you owe.Even if you file for bankruptcy protection, those merchant cash advance debts may not get discharged because of how they’re structured as purchase agreements rather than loans.It’s a total mess – you could end up having to pay back that sky-high interest debt for years after your business is gone, or risk having your personal assets seized.There have been cases of merchant cash advance companies going as far as trying to garnish people’s wages or even put liens on their homes over these debts. It’s honestly kind of terrifying if you think about it.
Potential Defenses and Protections
Now I don’t want to be all doom and gloom here – there are some potential defenses and protections you may be able to use if you get hit with one of these nasty merchant cash advance situations:
- The Truth in Lending Act – This federal law requires lenders to disclose key terms like the annual percentage rate (APR) and total costs. Some courts have ruled that merchant cash advances should follow these disclosure rules too since they’re essentially serving as lenders.
Usury laws – Most states have laws capping how high interest rates can go for loans. If you can argue that your merchant cash advance is really just a disguised loan, those usury laws could potentially apply and invalidate the crazy high rates. - Unconscionability – This is a legal concept where a contract term is so unfair and one-sided that a court may deem it unenforceable. The confession of judgment clauses in merchant cash advances are prime candidates for being unconscionable.
- Fraud/misrepresentation claims – If the cash advance company misled you about the true costs or risks involved, you may be able to argue fraud or misrepresentation as a defense.
The key though is getting ahead of it and not just ignoring things if you get sued over a merchant cash advance. Consulting with an experienced attorney who understands these transactions is crucial for protecting yourself.
The Ethical Dilemma
Look, I get it – when your business is struggling and you’re desperate for cash flow, a merchant cash advance can seem like a lifeline. The companies make it sound so easy and risk-free upfront.But the reality is, these products are frequently predatory and can put entrepreneurs in absolutely devastating financial situations, especially if their business ultimately fails.From an ethical standpoint, you have to ask – is it really okay for companies to be using these kinds of legally dubious tactics and outrageous interest rates? Just because the law hasn’t quite caught up yet, does that make it right?I think we all know the answer to that one. These merchant cash advance companies are taking advantage of people’s desperation and lack of affordable financing options.At the end of the day, they’re more interested in making money hand over fist than actually helping small businesses survive and thrive long-term.
The Bottom Line
Here’s the bottom line, folks – merchant cash advances need to come with a huge warning label. The risks and potential downsides are just way too severe, especially for businesses already in a fragile state financially.If you’re in that situation, I really think you should explore other options first before going down this road:
- Look into getting an actual loan from a bank or online lender – sure, the approval process may be tougher, but the rates and terms will be way more reasonable.
- Consider taking on an investor or raising capital another way.
- Talk to a bankruptcy attorney to see if that may be a better path if your business is truly past the point of no return.
- Negotiate with vendors, creditors, and landlords to try restructuring your existing debts.
I’m not saying merchant cash advances should be made totally illegal or anything. But at the very least, the disclosure requirements and regulations around them desperately need to be overhauled and modernized.No more burying the true costs in pages of fine print. No more allowing confessions of judgment that strip away due process. And definitely no more interest rates that would make a loan shark blush.Small businesses are the backbone of our economy – they deserve access to fair, transparent financing options that don’t put them at risk of financial ruin down the line.So be smart out there, entrepreneurs. Do your research, read the fine print, and don’t let anyone take advantage of you and your dreams, no matter how cash-strapped you might be.