How Merchant Cash Advance Transactions Are Treated in Business Bankruptcies

Running a small business is tough. Even very successful operations have times where revenue is not sufficient to meet financial obligations. Though the terms can be onerous, it is not surprising that many retailers and other companies turn to merchant cash advances when they need a quick monetary infusion. In these arrangements, the business receives a prompt payment from a company in exchange for a percentage of forthcoming receivables. 

Frequently, a merchant cash advance (MCA) provider will be a creditor in a small business bankruptcy. However, the nature of the arrangement often prompts questions of how the MCA will be treated by the Bankruptcy Court because it has elements of both a sale and a loan. 

An entity that funds the MCA might assert that they have purchased an interest in the company’s near-term revenue. This ownership stake would mean that they would keep receiving payments regardless of the automatic stay, because it is not the bankruptcy filer that is transferring the funds. On the other hand, if the MCA is viewed as a loan, the revenues would be deemed as repayments coming from the bankruptcy estate, which would be subject to the automatic stay. 

One factor sometimes used to clarify the nature of the MCA is the payback structure. When the recipient of the lump agrees to provide a specific amount from their receivables, that resembles a loan obligation more than the sale of a business interest. If recharacterized as a loan, the MCA provider is typically considered a secured creditor with a lien on receivables and proceeds. In that case, the debtor would likely need consent or a court order to provide repayment from their revenue. 

Depending on the circumstances, the trustee might allege that the agreement with the MCA provider constituted a fraudulent transfer, even if the language of the agreement states that the transaction was not a loan. The provider could also initiate an adversary proceeding in pursuit of a decision stating that the transaction was a sale.

Jeff Field & Associates handles a wide range of debt relief issues for small businesses, including the filing of Chapter 11 and Chapter 7 bankruptcies. We can counsel you on how your specific MCA might be viewed by the trustee and court. Please call 404-381-1278 or contact us online to schedule a consultation. Our offices are in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.