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Withholding Payments for Breach of MCA Agreements

Merchant cash advance (MCA) agreements allow businesses to receive an upfront sum of money in exchange for a percentage of future sales. However, conflicts can arise if the business breaches the agreement’s terms. Lenders may respond by withholding payments owed to the business.

Grounds for Withholding Payments

Lenders can legally withhold payments if the business breaches the MCA agreement. Common grounds include:

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Failure to make daily payments – The business agrees to send a fixed percentage of daily revenue to the lender until the advance is repaid. If the business misses payments, the lender can withhold outstanding amounts.
Shutting down or selling the business – MCA agreements require the business to operate continuously until repayment is complete. If the business closes or is sold prematurely, outstanding amounts become due immediately.
Providing false information – Information about daily revenue and credit card processing volumes is used to determine advance sizes and repayment terms. If the business falsified figures during underwriting, the lender can declare a default and withhold payments.

Lenders do not need to obtain a court judgment to start withholding payments in these scenarios. The ability to take this action is typically outlined in the MCA agreement’s terms.

Consequences for the Business

Withheld payments can severely impact businesses that rely on cash flow from credit card sales to cover expenses:

Cash flow disruption – By diverting a percentage of daily revenue, a lender can cut off crucial cash flow for payroll, rent, supplies and other obligations. This can force the business to shut down or lay off staff.
Balloon repayment – MCA agreements charge very high effective interest rates, often over 100% APR when fees are included. If a lender withholds 6 months of payments, the balance owed can balloon uncontrollably.
Credit damage – Non-payment of debts can hurt the business’s credit rating with reporting agencies like Experian and Equifax, making it harder to access financing in the future.
Lawsuits and collections – Lenders can assign unpaid balances to collection agencies or file lawsuits to secure judgments against the business and its owners. This also damages credit.

Responding to Withheld Payments

If payments have been unjustly withheld, there are steps the business can take to respond:

Review the MCA agreement – The withholding of payments may still fall within the lender’s rights under the contract. Understanding the agreement’s exact default clauses is essential.
Send a demand letter – Formally request that the lender release payments and provide a reasonable timeframe (30 days) for response. Consult a business lawyer for assistance with properly formatting the letter.
Attempt negotiation – Explore whether the lender is willing to reinstate payments if certain conditions are met, like resuming operations or providing additional reporting. Consult an experienced negotiator.
File for emergency relief – Seek a temporary restraining order from a local court ordering the lender to release payments while any contract disputes are resolved. A business litigation lawyer can advise if this action is viable.

Long-Term Precautions

To avoid future payment withholding issues, businesses should take precautions when seeking merchant cash advances:

Thoroughly vet lenders – Check complaints, lawsuits, and reviews to verify ethical practices and fair default clauses. Avoid lenders who withhold payments over minor issues.
Understand high costs – MCA loans carry annual interest rates from 30% to 290% when all fees are calculated. Be conservative when projecting repayment ability.
Explore alternatives – Other financing options like business loans, lines of credit, or factoring may have lower costs and more flexibility than MCA agreements.
Consult a lawyer – Have an attorney experienced with small business financing review any MCA agreement before signing to understand risks and obligations.

Withholding of payments by MCA lenders can happen quickly, severely impacting a business’s operations and credit rating. Seeking legal advice when responding and taking precautions when borrowing against future sales are essential.

About the Author

John Smith is a business financing advisor with over 10 years of experience. He specializes in helping small business owners understand their options when cash flow issues arise. John received his MBA from Stanford University with a focus on entrepreneurial finance. He provides free consultations to review cash flow, profitability and financing alternatives.

When Can Payments Be Legally Withheld

Lenders do not need to obtain any special legal permissions before withholding payments from merchants who have breached their MCA agreements. The ability to take this action is specifically outlined as a contractual remedy within the agreement’s default provisions in section 18.However, lenders cannot withhold payments arbitrarily – legitimate grounds must exist. These include:

Failure to Provide Daily Payment Percentage

A core obligation merchants agree to in MCA contracts is submitting a fixed percentage of daily revenue until the advance is fully repaid. If the specified percentage is not transferred by the merchant through their credit card processor, then the lender has grounds to halt outstanding payments owed to the business.

Shutting Down or Selling the Business Prematurely

MCA agreements require the business to remain fully operational until the advance has been paid back in full. If the business unexpectedly closes down or is sold to a new owner prior to repayment completion, the lender can declare the remaining balance due and immediately withhold all outstanding amounts owed to the business.

Providing False Information During Underwriting

Data about average credit card volumes and sales revenue is provided by the merchant during the application process and used by lenders to determine the size of the advance and structure repayment terms. If any figures given were proven to be falsified or misrepresented, the agreement could be declared in default.

Responding to Wrongfully Withheld Payments

If a business has met all its contractual obligations and payments are still being withheld without cause, merchants do have options:

Filing for Emergency Relief

Businesses can request local courts issue a temporary restraining order requiring the lender to release payments while contract disputes are resolved. Success often depends on clear evidence that the business upheld its end of the bargain. A litigation lawyer can advise if this action is viable.

Attempting Refinancing

If some operations have been suspended, refinancing the remaining MCA balance with another provider could secure funds to resume trading. New advances can pay off old ones, but overall costs are higher. Consult a small business financing advisor to explore viability.

Structured Settlement Negotiation

In some cases, lenders may agree to release a portion of withheld payments if certain concessions are met – for example, guaranteeing the business’s sale within a defined timeframe. A settlement negotiator can assist in these talks.

Avoiding Future Issues

While lenders don’t need court permission to withhold payments, there are precautions merchants can take to prevent issues:

Vet lenders thoroughly – Check complaints, lawsuits and reviews to verify reasonableness of default clauses. Avoid lenders who withhold over minor breaches.
Understand high costs – Effective rates on MCA loans often exceed 100% APR when all fees are included. Model conservative sales projections when assessing affordability.
Explore alternatives – Options like business loans, lines of credit or factoring may carry less risk than MCA advances.
Review agreements carefully – Have a small business lawyer scrutinize any contract before signing to fully understand obligations.

Seeking legal advice when responding to withheld payments while taking preventative measures when initially securing financing can help merchants avoid cash flow emergencies.