An alternative lender filed a lawsuit against me and my company... what should I do?

Have you been sued by an alternative lender? Each day, numerous small business owners encounter lawsuits from Merchant Cash Advance (MCA) companies. Unfortunately, a significant number of these business owners are uncertain about how to proceed. In reality, more than 90% of small business owners facing lawsuits from MCA companies do not respond, leading to judgments against both their businesses and themselves personally. This article unpacks the process and offers advice on what steps to take if a small business owner is sued by an MCA company.

By Thomas Tramaglini, Chief Operations Officer

thomas@beaconclientsolutions.com

About Thomas Tramaglini

Every day, many lawsuits are filed against small business owners. From our experience, we have observed that numerous small business owners are uncertain about how to manage these situations. While some are aware of Merchant Cash Advances (MCAs), ignoring an MCA lawsuit can adversely affect their businesses and personal finances.

This is why we have put together a list of crucial information every small business owner should know during this process.

Do not panic and make rash decisions regarding your situation.

Being sued does not mean you will be arrested or imprisoned for defaulting. Often, brokers or lenders threaten clients with criminal charges if they do not pay immediately. Keep in mind, these are civil lawsuits, not criminal ones. A significant series of events would need to occur before it becomes a criminal issue.

In certain situations, brokers or lenders have threatened family members, clients, or the business owner with violence. If this happens, contact the police immediately.

The alternative lenders will tell you not to seek assistance because you will not get a better outcome. This is 99.99% false.

When an MCA company sues you, it's important to know that no one on their side cares. The MCA company, their attorney, and any collection agency involved simply want you to pay. They are focused on getting their money back by any legal means necessary.

We've witnessed the good, the bad, and the ugly of the MCA collections industry. Many MCA companies, driven by investors, employ tactics like UCC freezes and judgments to recover debts. They are relentless in their pursuit, regardless of who the client is.

It is not illegal to get help. Specifically, having an attorney like one of ours answer your lawsuit prevents immediate judgement and allows for a professional to represent you.

If you haven't experienced harassment yet, you likely will.

Brokers and MCA companies are determined to collect their money, often using any tactics necessary. While not all are like this, many can be quite aggressive. Be ready for persistent harassment at any time of day.

One benefit of working with us is our ability to quickly stop these harassing calls, texts, and emails.

Understand Your Deadline to Respond to the Lawsuit

Generally, you have 30 days to reply to an MCA lawsuit. If you're in the state where it was filed, such as New York, you have 20 days. It's essential to respond to the lawsuit, no matter the timeframe.

Playing stupid does not get you anywhere but to a judgement against you.

We frequently hear people say, "I wasn't served." Many small business owners give up their right to be formally served when they sign MCA agreements. It's crucial to review each agreement for a clause detailing how you will be notified of a lawsuit, which is often through regular mail, certified mail, or email. It's important not to overlook this, as not responding can result in a judgment against you.

Your local attorney is usually not going to help you - you need an attorney in the venue you were sued in.

It's common for clients to say they have an attorney, but it's essential to hire one who is licensed in the state where the lawsuit was filed. For example, if the lawsuit is in New York, you need an attorney admitted to practice there.

Our company offers experienced MCA law attorneys who can handle any situation effectively.

Answer Your Lawsuit with an Attorney

In most states, business owners must hire an attorney to respond to lawsuits. Although there are affordable software solutions for self-answering, you should be careful. Some states prohibit self-answering, and it often leads to a judgment.

Brokers Who Funded You Want to Fund You More

Some brokers want to ensure they get paid on your MCA and may offer more funding. However, if you're struggling to repay your current debt, this only deepens your financial predicament.

Be wary of working with Debt Settlement Companies Who Have an Attorney Network

Some debt settlement companies claim to have a nationwide attorney network...

For instance, in a previous article we wrote…

This is just foolish. No MCA Settlement (or any company) has hundreds of attorneys nationwide. And good attorneys are worth their weight in gold.

For example, Shore Financial Solutions has this on their website:

“What happens if a creditor files a lawsuit?

Shore Financial Soluitons (Typo on Shore’s website) has an Attorney Network of 500+ local attorneys that handle all legal motions, as well as aid in the negotiations of your debts.”

Many attorneys will file a response to a lawsuit if a business owner is sued, but this often has limited effect. When dealing with a summary judgment or a motion from an MCA company, or if you need a negotiator, I wouldn't depend on network attorneys who merely handle paperwork.

Most reputable attorneys charge between $400 and $500 per hour. Our attorneys charge slightly less, but not significantly less. Networks like the “Sunshine Network” offer what we consider to be copy-and-paste attorneys for $100 per month.

To someone unfamiliar with legal matters, this might seem attractive. However, considering the seriousness of a lawsuit, I wouldn't want one of these attorneys representing anyone. This doesn't mean there aren't capable attorneys in the network, but no attorney would earnestly defend someone for $100 per month.

Avoid Judgments

Avoid judgments at all costs. MCA companies file lawsuits in states favorable to their claims, like New York. In NY, if you fail to respond to a lawsuit in time, a clerk from an attorney’s office can have the court clerk sign the judgment order without notice.

Moreover, MCA companies not only sue the business but also the small business owner personally.

What does this imply?

With a judgment, the MCA company can initiate collections by freezing and seizing assets. Furthermore, some MCA lenders can easily transfer the judgment (if it's from another state) to your state (domestication) and quickly start asset collection. This includes bank savings, assets like jewelry, non-primary real estate, and more. They can also require you to undergo discovery proceedings by collecting bank statements, tax returns, and other documents, preventing you from hiding assets.

In simpler terms, you DO NOT want a judgment.

I was working with a debt settlement company, and they are handling it.

If you're working with a debt settlement company and they claim to be handling the lawsuit, ensure they truly are.

There are several settlement companies who do things like have clients purposefully default on their obligations and more (see here).

Protect Yourself by Understanding UCC

The Uniform Commercial Code (UCC) is a collection of laws that regulate commercial transactions and is recognized by all U.S. states. Lenders and Merchant Cash Advance companies use UCC filings to assert their rights to collateral or liens on loans or tangible assets.

Often, an MCA company has placed a UCC lien on a small business owner. If someone is having difficulty repaying their MCA or ceases payments, they can anticipate a UCC lien being filed. This is a challenge many small business owners face, so if you're being sued, use our tool to check if a UCC has been filed against you and contact us to find out what steps to take.

How can UCC liens affect your business?

• UCC liens indicate to others that you have a security interest lien.

• They prevent additional borrowing.

• They negatively impact your business credit.

• Assets pledged for recovery.

MCA Company Actions:

• Pressure your suppliers.

• Pressure your customers.

• Stop customer payments.

• Lock your assets.

• Lock your bank accounts.

• Withhold funds collected by your credit card processor.

• Withhold funds with a licensing agent.

• And many more...

Potentially inform employees, suppliers, etc.

If an MCA company sues you, they may reach out to your clients, suppliers, employees, and more. Be prepared to handle this. Such actions are often allowed through your agreement or UCC actions.

The team at Beacon can assist you with letters, templates, etc., to prevent this from happening.

Report to business credit

When a small business is sued, it typically appears on a Business Credit Report (Experian, Dun and Bradstreet, Equifax) and can also show up on your personal credit report.

This means you will be cut off from future borrowing.

Attempt to Work Out the Debt with The Attorney or MCA Company/Lender

When an MCA company takes legal action against a small business owner, it is usually to either 1) satisfy the investors of the MCA company or 2) encourage clients to repay their MCAs.

Those who opt to engage directly with the MCA company have the opportunity to negotiate their settlement and assist themselves. However, the problem is that being sued puts them at a disadvantage compared to an MCA lender and attorney, and if anything goes wrong before the repayment is finalized, the consequences can be much more severe in the long term.

It is advisable not to settle with an MCA company or their law firm on your own without first consulting or hiring an attorney.

Be Wary of Scams If You Get Sued.

If you are sued, be cautious of scams. Some debt settlement companies might reach out, promising you an 80% reduction in repayment or claiming they will penalize the MCA companies. Although we have witnessed savings reaching 80%, we never use this as a tactic to draw clients to our corporate portfolio. We believe that honesty, care, and transparency with clients are far more effective.

Recently, we published an article detailing some schemes used by debt settlement companies to help small business owners avoid scams. This article, titled "Scams that MCA Settlement Companies Use on Vulnerable Small Business Owners," has been downloaded thousands of times and is popular among our clients.

Contact Beacon Client Solutions to better understand your situation and how we can help you.

Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers, The State University of New Jersey.

Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.