Merchant Cash Advances in Bankruptcy: A Webinar on Key Topics

Sean Williams recently presented a webinar on one of bankruptcy’s most nuanced and fast-moving topics: Issues around merchant cash advances (MCAs).

“Merchant Cash Advances in Bankruptcy: True Sale or Loan, Effect on Post-Petition Receivables, Liens, and More” examined how MCA funding is unlike traditional forms of receivables financing, and how it raises thorny issues both in and out of bankruptcy. Under an MCA agreement, the merchant “purchases” or advances a lump sum in exchange for a percentage of the debtor-seller’s future sales revenue. The advance usually bears an extremely high interest rate, and is repaid, along with fees, daily or weekly over a short time.

Bankruptcy courts do not hesitate to recharacterize MCA transactions as loans, with all the attendant consequences to both the purchaser-lender and the seller-debtor. The critical question is which party bears the burden of non-payment of the receivable, and courts have reached different conclusions on similar facts. Additionally, MCA funding has come under scrutiny from state regulatory agencies and even the Federal Trade Commission.

Sean’s session zeroed in on specific topics, including:

• How do MCAs differ from factoring or traditional ABL?
• On what basis will courts recharacterize an MCA as a loan?
• Does the MCA lender hold an interest in property of the estate?
• Does the MCA lender hold a claim?
• Is the MCA lender vulnerable to preference claims?

For more information on this topic, read Sean’s recent article on MCAs, or reach out directly to Sean or another member of LP’s Financial Services & Restructuring group.