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Part 4 of a 5-Part Series:
A Comprehensive Guide for Business Owners Facing Revenue Challenges in 2025 and Beyond
Part Four: Merchant Cash Advance Collection Tactics and Legal Defenses
Understanding the MCA Landscape
Merchant Cash Advances have become a significant financing source for small businesses, particularly those that don’t qualify for traditional loans. However, when revenue declines make repayment difficult, some MCA companies employ aggressive collection tactics that may cross legal lines.
Understanding both legitimate MCA collection practices and your legal defenses is essential for businesses struggling with MCA obligations.
How MCAs Work and Why They’re Different
Unlike traditional loans, MCAs technically involve purchasing a portion of future receivables at a discount. This legal structure affects collection rights significantly. Because MCAs are structured as commercial transactions rather than loans, they typically avoid usury laws that would otherwise limit interest rates. However, this structure also means that if the business genuinely has no receivables, there’s nothing to collect.
The “reconciliation” provisions in many MCA agreements require payments to adjust based on actual revenue. When revenue declines, contractually required reconciliation should reduce payment amounts. Many businesses don’t realize they have this right, and some MCA companies don’t proactively honor reconciliation obligations.
Aggressive Collection Tactics to Recognize
When MCA repayments become difficult, some MCA companies escalate quickly. Understanding common tactics helps you respond appropriately.
Confession of Judgment Enforcement
Many MCA agreements include confession of judgment (COJ) clauses allowing the MCA company to obtain a judgment without normal court procedures. In states that enforce COJ clauses for commercial transactions, this can result in sudden judgments and frozen bank accounts.
However, COJ clauses are void in some states (including New York as of 2019 for out-of-state merchants), and their enforcement is subject to challenge in others. Procedural defects, lack of proper notice, and substantive unfairness may provide grounds to vacate improperly obtained judgments.
UCC Lien Enforcement
MCA companies typically file UCC-1 financing statements claiming security interests in business assets. When seeking to collect, they may threaten to seize equipment, inventory, or accounts receivable.
However, UCC enforcement has procedural requirements. Secured parties must act in “commercially reasonable” manner when enforcing security interests. Wrongful seizure, inadequate notice, or commercially unreasonable disposition of collateral may give rise to claims against the MCA company.
Personal Guarantee Enforcement
MCA agreements almost always include personal guarantees from business owners. When the business cannot pay, MCA companies often pursue personal assets through guarantee enforcement.
Personal guarantee enforcement has limits. The MCA company must obtain judgment against you personally, and collection is subject to state exemption laws protecting certain assets. Understanding what assets are protected in your state helps you assess actual exposure.
Harassment and Intimidation
Some MCA collection practices cross into harassment or intimidation. Common problematic behaviors include excessive calling to business and personal numbers, threatening to contact customers or business partners, misrepresenting legal rights or consequences, and threatening actions the company cannot legally take.
While the FDCPA doesn’t directly apply to commercial debts, many states have broader consumer protection laws, and extreme conduct may constitute tortious interference, defamation, or other actionable wrongs.
Legal Defenses Against MCA Collection
Challenging the MCA as a Usurious Loan
Despite their legal structure, courts have increasingly examined whether particular MCAs are actually loans disguised as receivable purchases. Key factors include whether the MCA has an absolute repayment obligation regardless of receivables, whether reconciliation rights are illusory, and whether the effective interest rate is unconscionably high.
If recharacterized as a loan, state usury laws may apply, potentially voiding or substantially limiting the obligation. Several recent court decisions have favored merchants on these grounds.
Enforcing Reconciliation Rights
When revenue declines, MCA agreements typically require payment adjustment. If the MCA company refuses legitimate reconciliation requests, they may be breaching the agreement. Document all reconciliation requests, provide required financial documentation, and preserve evidence of the company’s response.
Breach of reconciliation obligations may provide defenses to collection actions and potential counterclaims for damages.
Challenging Confession of Judgment
If the MCA company obtained judgment through confession of judgment, numerous challenges may apply. Procedural defects in the COJ execution, lack of proper notarization, substantive unconscionability, and violations of state-specific COJ restrictions all provide potential grounds for vacating judgment.
Time limits for challenging COJ judgments vary by state. Acting quickly upon learning of a judgment is essential.
Unconscionability and Fraud Claims
MCA agreements with unconscionable terms may be voidable or subject to modification. Relevant factors include significant disparity in bargaining power, hidden or obscured unfavorable terms, absence of meaningful choice, and terms so one-sided they shock the conscience.
If MCA company representatives made fraudulent misrepresentations about terms, costs, or reconciliation rights, fraud defenses and counterclaims may apply. Document all communications and preserve any written representations.
Procedural Defenses
Collection actions must comply with applicable procedural requirements. Service of process defects, improper venue, statute of limitations issues, and failure to comply with pre-suit requirements all provide potential defenses.
Even if the underlying debt is valid, procedural defenses may buy time for negotiation or force more favorable settlement terms.
Practical Steps for Handling MCA Collection Pressure
When facing MCA collection pressure, take these practical steps to protect your rights and position.
Preserve All Documentation
Gather and preserve your original MCA agreement, all amendments and modifications, all communications with the MCA company, bank statements showing payment history, financial records documenting revenue changes, and any marketing materials or representations made during origination.
Understand Your Agreement
Review your MCA agreement carefully, focusing on the reconciliation provision terms, personal guarantee scope, confession of judgment terms, default definitions and cure rights, and choice of law and venue provisions.
Calculate Actual Payments Made
Determine exactly how much you’ve paid against the original advance. In many cases, businesses have paid substantially more than they received, and continuing collection may be unconscionable.
Assert Reconciliation Rights
If your revenue has declined, formally request reconciliation in writing. Provide required documentation and specifically cite the reconciliation provision. Preserve proof of your request and the company’s response.
Consult Qualified Counsel
MCA defense has become a specialized practice area. Attorneys experienced in MCA disputes understand the evolving legal landscape, successful defense strategies, and negotiation approaches that work. The investment in qualified counsel often produces returns through debt reduction, defense victories, or favorable settlements.
Consider Affirmative Claims
If the MCA company has engaged in improper collection practices, you may have affirmative claims for damages. These claims provide negotiating leverage and, in some cases, may exceed the amount the MCA company seeks to collect.
Check our Part 5, the Final Wrap-up
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