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Debt Settlement Scams: A Guide for MCA Funders

Fake money on a table with four dice that form the word “SCAM.”

In an era of unpredictable market dynamics and tightening financial constraints, small and medium-sized enterprises (SMEs) face an increasingly challenging economic landscape. 

As traditional forms of financing become more elusive, many of these businesses have turned to merchant cash advances (MCAs) as a financial lifeline. While MCAs offer the flexibility SMEs require, there’s no denying that the shifting economic climate can make debt repayment a significant struggle for some merchants—it’s an unfortunate reality of our times.

Alarmingly, this challenging situation has spawned a rise in dubious debt settlement companies. 

Capitalizing on the vulnerabilities of these SMEs, they tout grandiose promises of drastically reducing or even eradicating MCA repayments. Sadly, these companies often leave the SMEs in worse financial straits than they were before.

In today’s article, we will delve into the murky waters of unlawful MCA debt settlement. The goal is to highlight the risks these organizations pose and provide actionable insights to aid funders in educating and protecting their SME clients from such predatory practices.

What Is a Debt Settlement Scam?

In the MCA world, debt settlement companies are gaining a notorious reputation for their deceptive practices.

These companies offer SMEs what is essentially a negotiation service. That is to say, these organizations claim to be able to negotiate with a merchant’s MCA funder to lower the merchant’s total debt obligation… but for an exorbitant fee.

While this might seem like an attractive solution for struggling SMEs, the age-old saying holds true: “if it sounds too good to be true, it probably is.”

Here’s how these unlawful debt settlement companies operate:

  • Swooping in: they target merchants who are struggling to meet their repayment obligations. Promising the world, they claim they can magically renegotiate their MCA contract and lower payments.
  • Fear tactics: to create an atmosphere of urgency, they portray MCA providers as the “villain,” accusing them of charging exorbitant fees and using “predatory” lending practices—when in reality they are the ones doing exactly that.
  • Reckless advice: in many cases, these companies even suggest that merchants intentionally default on their repayments as a negotiation strategy.

Unfortunately, many merchants fall for these tactics, choosing to breach their MCA contracts and repayment obligations, inadvertently opening themselves up to a wide range of financial, legal, and reputational consequences, including:

  • Extra fees: merchants usually end up paying a default fee (typically around $5,000, but we have also seen fees of up to 20% of the MCA contract balance) on top of the upfront costs already paid to the debt settlement company.
  • Legal fees: when legal matters arise, debt settlement companies often lack legal expertise and tend to abandon their clients, leaving merchants to navigate the legal complexities alone.
  • Funding alienation: many funders will avoid working with merchants who have previously worked with a debt settlement company. 

As you can see, partnering with a predatory debt settlement company is bad for a merchant’s business. Unfortunately, many merchants are not aware of the potential consequences. They not only lose in the short-term with respect to the economics of the deal, but they also lose in the long-term when it comes to their reputation in the industry. 

What We Can Learn From the Courts

Although unlawful debt settlement companies can be a huge headache for funders, there’s good news—the courts are on our side. 

A great example is the case of Yellowstone Capital and Everest Business Funding.

A few years ago, the two companies sued a group of debt settlement companies and ISOs for encouraging merchants to intentionally default on their existing MCA contracts. 

While the defendants profited from this scam, they lost in the courts… and lost big. 

The lawsuit resulted in a hefty settlement of $500,000, and the defendants were banned from offering services to any Yellowstone or Everest merchant clients.

This case sends a clear message that legal repercussions await for deceptive debt settlement companies

Onyx IQ’s Perspective

At Onyx IQ, we are committed to supporting MCA providers and standing against the detrimental practices of deceptive debt settlement companies.

As demonstrated by the Yellowstone/Everest case, there are potential legal and financial consequences for these companies when they induce merchants to violate the terms of their contracts. The lawsuit also underscores the point that legal action can and should be an option for MCA providers who face damage from these practices. 

Moreover, by pooling information on these unlawful firms and backing one another up, MCA funders can:

  • Shield their investments.
  • Protect their reputation.
  • Preserve the integrity of the MCA funding industry. 

Above all, it’s important to foster transparency and build trust with your merchant clients. We believe that healthy MCA funder-merchant relationships are essential to ensuring a fair and thriving industry for all.

So, as an MCA funder, how can you protect your merchant clients?

Best Practices for MCA Providers

When it comes to navigating the world of unlawful MCA debt settlement, MCA funders can take a number or proactive measures that will help build trust with merchants and protect them from unscrupulous debt settlement companies.

1. Focus on Merchant Education

As an MCA funder, you have a critical role in not only providing financial support to merchants, but also educating them on all things MCA.

This includes ensuring that they understand their financial commitments when they accept an MCA contract.

So, be sure to take time to thoroughly explain a contract’s terms, including the rights and responsibilities of each party.

Also, look to stay up to date on the latest scams and fraudulent tactics employed by debt settlement companies, which may approach your merchants with enticing promises. Inform merchants of deceitful actors who will say anything to win their business.

Also, we encourage you to share with your clients the FTC’s list of companies and people banned from providing debt relief services.

Your actions will empower merchants to identify potential red flags and make smarter financial decisions—decreasing the chances of them falling prey to predatory debt settlement firms. 

2. Maintain Open and Transparent Communication

Merchants experiencing financial challenges are sometimes hesitant to reach out to their MCA provider. This may be due to fear, or simply they are unaware of their contractual rights.

That’s why fostering open communication should be of utmost importance.

In doing so, funders can proactively identify potential issues and work collaboratively with merchants to find solutions. This also helps deter merchants from seeking the assistance of debt settlement companies. 

From the very beginning of the provider-merchant relationship, it is critical to inform the merchant of three things:

  • Their contractual rights: typically, the merchant has a contractual right to communicate openly about any payment hardships they may be experiencing. 
  • MCA repayment flexibility: many MCA funders are willing to work with merchants to establish a more manageable repayment plan should hardships arise.
  • First point of contact: the MCA funder should always be the merchant’s first point of contact should they have any issues or doubts.

By communicating these three points, you can ensure that your merchant clients understand that you are there to support them and are invested in their success.

3. Don’t Engage—Instead, Rely on Your Legal Experts

As tempting as it may be to respond to one of these companies as they try to poach your merchants, there are really no benefits to doing so.  

Engaging with these companies will do more harm than good. Don’t give them the time of day! 

You have a contract with your merchant, and you both have rights and responsibilities under that contract. If a merchant runs afoul of their contract because of third party interference, the best course of action (after speaking with your merchant directly) is legal recourse.

A legal expert can offer valuable advice that will best protect your interests.

In other words? You’re an expert in revenue advances. Leave the legal work to a trusted team of lawyers while you focus on what you do best—providing reliable MCAs to SMEs. 

Let’s Work Together to Drive Our Industry Forward

The rise of unlawful debt settlement companies in the MCA industry is a growing concern that cannot be ignored—especially given the impact of their deceptive practices on the funder-merchant relationship.

It is therefore crucial for MCA funders to remain cautious and informed, and prioritize direct and transparent communication with their merchant clients. 

At Onyx IQ, our mission extends beyond providing digital lending solutions for MCA providers.

We are dedicated to equipping MCA funders with the insights and support they need to make informed, smart decisions. 

Connect with our team at Onyx IQ today to explore how we can form a sustainable partnership that helps our industry continue to grow and thrive.

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