How to limit risk in a Merchant Cash Advance lawsuit

May 9, 2023

There has been an increasingly high demand for contingency on MCA legal enforcement. Alternative Finance Companies want to work with third-party collectors who only get paid upon collecting the debt, in contrast to using tools like replevin that often bill hourly. Often, lenders don’t care if the money is collected voluntarily or through a merchant cash advance lawsuit.

Due to the competitiveness of the merchant cash advance market, alternative finance companies are willing to take on more risk in order to connect with guarantors. In doing so, lenders will agree to take a 2nd, 3rd, 4th, and even up to 7th and 8th lien position to an original cash advance, effectively ‘stacking’ the debt.

This can happen without the knowledge of the first financier and is a known problem in the alternative finance industry.

With increased stacking happening in the alt finance industry, lenders are looking for ways to limit financial risk. Working with a third party that only gets paid when money is collected gives the collection agency as much of a stake in the transaction as the lender. Everyone needs the money collected in order to get paid—if the merchant is willing to pay.

When to Pursue a Merchant Cash Advance Lawsuit

What happens when the guarantor is unwilling to pay? Both the lender and the collector are invested in resolving the debt, and sending files that score high for suit eligibility out for litigation is becoming an increasingly popular way to find a resolution. Urgency plays a role in every merchant cash advance lawsuit, as our clients recognize that the first lender to take the legal route in this stacked industry is the most likely to get paid.

The first person to obtain judgment can initiate bank levies, writs of attachment on assets, place liens on property, and other measures that put this first party in a priority position to get paid. However, a broad-sweep approach to litigation is not the most fiscally responsible course of action. There is an art to balancing urgency with discernment for a quick, effective response to unwilling-to-pay guarantors.

Urgency is important, but incisiveness is key

We never operate on an ‘enforce everything’ standpoint. Instead, we use a proprietary scoring model to determine which accounts actually make sense to pursue legal action, and which accounts equate to throwing lender money and collection agency time into a black hole.

Using Big Data for MCA Litigation

Instead of a broad-sweep, enforce-everything approach to MCA litigation, we only proceed against accounts that merit legal enforcement. When a debtor refuses to pay or hides but their credit/asset profile is strong, Our legal team will score the files for high propensity to pay with low bankruptcy/counterclaim risk and advise our clients on how to proceed. Our approach to each merchant cash advance lawsuit incorporates data insights including—but not limited to—business and consumer credit bureau reports, income information, general demographics, community property, business history information, additional liabilities, additional assets, the propensity of repayment and the probability of bankruptcy or counterclaim risk.

Our model recognizes:

  1. accounts that have a high propensity to pay

  2. low probability of bankruptcy or counter-claim risk.

This achieves two key outcomes:

  • increases net liquidation rates

  • allows clients to close on low-scoring files and sell to debt buyers.

By taking an incisive approach to pursuing litigation with MCA debt, we’re only enforcing files that have a high probability of payment. This increases our clients’ net liquidation rate while limiting their exposure to risk.

What makes an MCA collections file unfit for legal enforcement?

Merchants and guarantors sometimes have negative attributes that make litigation unattractive. These can include a number of factors:

  • serious indebtedness with judgments

  • tax liens and personal debt

  • the merchant’s industry is failing

  • demographic issues

  • medical debt

Alternatively, a debtor may have plenty of working capital but is represented by a very litigious attorney. Pursuing a merchant cash advance lawsuit is never without risk and that risk needs to be weighed very seriously—not only for our client but also for Dedicated.

What’s the next step if the merchant refuses to pay and there are no facts to support litigation or enforcement?

There are two possible courses of action after a merchant cash advance lawsuit is deemed unwise:

  1. The creditor can sit on the file and hope the circumstances improve or

  2. Cut losses, sell the debt to a debt buyer, and write off the loss

Don’t throw good money after bad. By working with a 100% contingency collections agency like Dedicated, alternative finance companies can limit risk.Whether you’re already experiencing high default rates or simply want to be able to act quickly when defaults begin to rise in the future, connect with our commercial collections experts now and be prepared for whatever uncertainty the future brings.