Using Arbitration to Resolve Merchant Cash Advance Disputes

Merchant cash advances (MCAs) have become a popular alternative financing option for small businesses in recent years. However, disputes can sometimes arise between merchants and MCA providers over repayment terms, fees, and other issues. Arbitration can be an effective way to resolve these disputes without going to court.

What is a Merchant Cash Advance?

A merchant cash advance provides upfront capital to a business in exchange for a percentage of future credit card sales over a set period of time.

The repayment amount is tied to the performance of the business – if sales increase, the MCA provider makes more money. If sales decline, the repayment amount decreases.MCAs are not considered loans because the merchant does not have a fixed repayment amount. However, MCA agreements do carry very high effective interest rates when calculated as an annual percentage rate.

Why Do MCA Disputes Occur?

There are several common reasons why a business owner may end up in a dispute with an MCA provider:

  • Disagreement over the repayment percentage or fees charged
  • Allegations that the MCA provider misrepresented terms or failed to fully disclose fees
  • Merchant claims violation of state laws capping interest rates
  • Merchant unable to repay after unexpected drop in sales
  • MCA provider attempts to access business bank accounts without permission

Unfortunately, many MCA contracts contain confusing language about repayment terms and arbitration clauses that limit the merchant‘s ability to sue. This tilts the playing field in favor of the MCA company when disputes arise.

Benefits of Arbitration for MCA Disputes

Arbitration is a private process where a neutral third-party reviews arguments and evidence from both sides before making a binding decision. Here are some potential benefits of arbitration for MCA disputes:

  • Faster and cheaper than going to court
  • Arbitrators may have expertise in complex financial transactions
  • Merchants retain control rather than defaulting and facing collection lawsuits
  • Flexible process allowing merchants to tell their side of the story
  • Ability to keep dispute and resolution details confidential

The arbitration process is not without flaws, however. The following section explores concerns merchants have about the fairness of arbitration.Criticisms of Forced Arbitration for MCAsMany MCA agreements require arbitration to take place in New York or Utah. This makes the process expensive and inconvenient for out-of-state merchants.There are also concerns that arbitration companies have an incentive to favor frequent corporate clients (like MCA providers) over small businesses. The secretive nature of arbitration means there is little oversight or ability to appeal unfair decisions.The Consumer Financial Protection Bureau has proposed banning forced arbitration clauses in financial contracts. But for now, most MCA agreements still contain arbitration clauses that merchants must agree to.Tips for Merchants in MCA ArbitrationIf you find yourself in arbitration over an MCA contract dispute, keep the following tips in mind:

  • Review the arbitration agreement carefully to understand the specific procedural rules and location where hearings will take place.
  • Organize documents like the contract, correspondence with the MCA provider, bank statements and credit card receipts. These can support your case.
  • Consider legal representation if possible. An attorney experienced with MCA arbitration can help prepare arguments and evidence. If attorneys fees are cost prohibitive, at minimum have a lawyer review your arbitration documents.
  • Highlight unreasonable terms or misconduct like misrepresentations during the sales process, excessive fees, or illegal banking activity. Arguments focused on fairness and reasonable standards often resonate with arbitrators.
  • Request an arbitrator with financing expertise if the arbitration agreement allows it. An arbitrator familiar with MCA contracts may better understand complex issues in your case.
  • Be ready to compromise. If the arbitrator identifies weaknesses in your case, be pragmatic about potential settlement solutions rather than insisting on a complete victory. This pragmatic approach generally yields better outcomes.

Changes on the Horizon for MCA Arbitration

Merchant trade groups and small business advocates continue putting pressure on state legislatures to reform MCA regulation, including limits on arbitration clauses.

The New York Attorney General has already taken enforcement actions against some MCA companies for fraudulent or deceptive practices.

Tighter regulation of the MCA industry may be on the horizon.In the meantime, arbitration remains the most practical option for merchants seeking resolution on MCA contract disputes. Preparing a well-organized case with reasonable arguments gives merchants the best chance at a favorable arbitration outcome.

How We Can Help

Here at Delancey Street, our attorneys have extensive experience representing clients in arbitration over complex financial transactions like merchant cash advances.

We understand the nuances of MCA contracts and effective strategies to challenge unfair terms or improper behavior by MCA providers.

If you have an upcoming arbitration case involving a merchant cash advance dispute, contact us for a free consultation. We will review your situation, answer questions about the arbitration process, and discuss legal strategy. With customized guidance from our legal team, you can approach arbitration with confidence.

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