Bloomberg News reporter, Eliza Ronalds-Hannon, interviews Second Wind Consultants President, Aaron Todrin.
The scope, practices, and need for regulation in the MCA (Merchant Cash Advance) industry are discussed.
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—Business Seller Financing and Renegotiation
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[Music] I’m iliza Ronald Tannen a corporate Finance reporter at Bloomberg News and I’m here at TMA’s distressed investing Conference speaking with Aaron Todd Hren The president of second wind consulting We’re gonna talk about merchant cash Advances which is a segment of the Market a product a phenomenon if you Want to call it that’s been increasing In frequency and in in popularity but Also in in sort of notoriety so we’ve We’ve seen some press including in Bloomberg about the people who get Caught having to honor these things and Go into court and having all their Everything taken so can you explain to Us a little bit what a merchant cash Advance is and what kind of clients ends Up using them yeah absolutely Eliza Thank you a merchant cash advance in its Simplest terms is a business payday loan For companies that need money they’re Financially strapped they don’t qualify For typical conventional lending they Need to seek alternative measures and in The private equity equity equity world If they can’t get funding they look to These MCS these merchant cash advances Which have asked absolutely exploded in The last five years it’s an alternative Lending mechanism where they advance you As a business owner money and they Purchase future receivables okay so it’s
Not really a loan if in fact is based on Future receivables that’s correct and That’s a really important distinction It is not alone it is a purchase of Something in the future they’re buying Money at a discount so in an industry Where you know a company does net 30 Terms where they don’t get paid for 30 Days something like this could be useful But the structure of this is totally Different so as you said it’s not a loan And therefore they don’t get regulated As such so they don’t have banking Regulations and and it’s it’s really Like they’re operating as a business Transactional deal type of situation Where they get to do whatever they want It’s it’s exploded so much because Access to traditional capital is is very Limited and it’s so easy for business Owners to get it that all the there is No underwriting process they just look At a few months Bank statements and they’ll give you a Loan for 100k 200k within 24-48 hours Just click on the button and it’s in Your operating account so it’s it’s it’s Very dangerous because people don’t Understand what they are and what are The interest rates on these so they see The interest rates when you when you Annualize it it sometimes we’ve seen as High as three hundred three hundred Fifty percent and they’re there they
Have access to your operating account as A business and they take daily Withdrawals to pay back that that Advance and it’s it’s it’s stifling and But they’re only borrowing on on how Short of a term so it depends it really It’s supposed to base it’s supposed to Be based on how much revenue you bring In but you know sometimes they last ten Months twelve months they’re all short Term very high yield can you give an Example of some of the types of Businesses that tend to use this yes so It used to be industries where they Would extend business on credits such as Net 30 or net 45 type of industries but Now we’re seeing it everywhere we’re Seeing it all across the country Regardless of industry doesn’t matter if It’s manufacturing service based or if It’s a cash transaction where there is No credit it is being issued everywhere To any financially strapped company in The country regardless of region and It’s there is no limitation who’s Backing these these companies that do The advance I mean do they where do they Get on their cash in order to be able to Loan there are a few banks small Regional banks that back them but most Often we’re seeing private money back These institutions and and there’s it’s It’s there’s no straight answer it’s a Bunch of different entities well tell me
About you know what you think that People are overlooking in the MSC a you Know fundamentals are in the language That that has been leading to these Really punitive coj is being enforced in Court and really taking everything from The whoever at the company signed a Personal guarantee with regard to the Right So as we established before these are Not loans it’s it’s in advance and Because of that the problem is that they They want Be classified as an advance so that they Don’t get subject to the scrutiny of the Regulations and the statutes and the Banking requirements but they’re acting Like loans and that’s a big problem Because people don’t read the fine print And and and and the companies that are Taking these are already financially Strapped so when things start to go Further south financially they’re these The collection practices of these MCAS Are absolutely killing businesses and They’re and they’re using these personal Guarantees to collect on the whatever’s Owed the deficiency balance when that’s Not appropriate the truth is in these in These documents in order to be in Advance they have to include a personal Guarantee for performance not a personal Guarantee for payment there’s actually No requirements enshrined in in any sort
Of document for the borrower to repay The entirety of what they received that Is 100% correct So when you think about a conventional Loan like a mortgage or something an Individual will sign the loan documents And they’ll sign a personal guarantee For payment it’s this it’s the simplest Thing everybody understands this if There’s a house and something goes wrong And you can’t pay your mortgage anymore They sell the house if there’s a if There’s a balance left over you have to Pay that you’re personally obliged to That that’s a personal guarantee for Payment in the tiny fine print they Change that to a personal guarantee for Performance in order to not be alone Yeah in order to not be alone and what That means is that the what they’re Guaranteeing what the distressed Business is guaranteeing it’s not Payment its Anytime they get revenue they give a Predetermined percentage to the MCA and They keep giving that predetermined Percentage to the MCA until the advance Is is paid back so again they’re buying Receivables So if receivables stop coming in if the Business shuts down there’s no debt to The business owner there’s that personal Guarantee is not a promise to pay all it Is again it’s a promise of performance
You know you know the lender or the the Provider of the advance is really just Out of luck if the business goes under Absolutely they’re taking risk they’re Charging for that risk Three hundred and fifty percent and and And and they’re winning but if it fails They have to take the loss the problem Is systemic in that at the beginning of Each of these advances there’s a what’s Called a confession of judgment that is Signed which means they that allows them To get a judgment which is that the Ruling of a court that happens when you Win a lawsuit which means they get to Skip the whole loss and you’re signing Away that judgment at the outset of the Advance and up upon this and when you Shut down your your business they’re Treating that as a default of a that you Are now personally obliged to and they Take that confession to judgment and They bring to the court and they and They and they file it with the court Bloomberg did an extremely detailed Expose on this and they identified that The entire issue with the co J the Players involved the the the service Processors but the problem is that the Court system they don’t require the Person the MCAS to show the basis for That Co J and they’re assuming that it’s A that it’s based on on payment of your Promise of payment rather than
Performance so I think that the co J in Theory I don’t have a big problem with That but the problem is that it’s what Is the basis for it and the basis for it There’s they’re using the basis as this This make-believe personal guarantee for Payment when really that’s not what the Documents say and the court system is Not or historically was not requiring Them to show the basis so that’s why They were able to do this legal sleight Of hand maneuver and get those co J’s These judgments without so is that Changing I mean what do you think is What’s the remedy for this well I think Ultimately the remedy is legislation This is the Wild West of alternative Lending and and it’s a ruthless world Out there and the fact that they have Access directly to your company or banks Operating an account and because you Have that personal guarantee any bank That you operate out of personally is Subject to a clean sweep and we see that Day in and day out and it’s and it’s Truly tragic it is a problem people are Are losing everything they’re losing Their homes and not to mention the jobs Of the company that just got shut down But I mean they’re losing their homes it’s It’s it’s absolutely horrible so I Believe that that legislation needs to Step in and play a role I don’t have a
Problem with the concept of high-yield Short-term loans if the market bears it We live in a capitalist society I’m okay With that But people need to understand what is is Happening and even further because they Don’t understand when they think that They are personally guaranteeing this Because that risk is so great they take Another MCA and then they take another MCA if they knew with the truth that That there there this is a personal Guarantee for performance then then they Wouldn’t do that they would take a Different path altogether and and we’re Seeing honest business people trying to Scratch their way out of these financial Holes and they have 10 11 12 15 MCA Stacked on top of each other and are They borrowing those in order to pay Back there’s no one that’s exactly right And what’s worse is that these these MCAS have you know multiple different Entities and they couldn’t keep popping Up so it’s like they’re they take out Another one from another entity to pay Off the other one but really it’s all The same it’s all the same group so Again I have no problem with the concept But the way this this legal sleight of Hand switching the personal guarantee How they’re treating that they don’t Want to be loans they don’t want that Regulation but they’re acting like it
And trying to have their cake and eat it Too that’s exactly right Well my only other question about that Then is will there be a whole sector of Distress for some of our the other Professionals here to look at in in Those merchant cash advance companies And once they when and if they become More regulated will they be going under Absolutely I mean it’s hard to say I’m Not too worried about what would happen If the MCA is go under but the truth is Is that these these MCAS really prevent Business investment and they make they Make the life very difficult for private Equity groups for venture capital Group’s for investment banks to try to Extract value from distressed businesses Because they’re stifled by these MCAS so It’s it’s it’s a really tricky situation But if we get this legislation in place And and there have been senators that Have moved for this the New York courts Where these are based have stopped Taking the confessions of judgment Thanks and great To the to the bloomberg article I mean That that really you know shined a light On what these practices are albeit Without the explanation of what it Really is that was focused just on the Fact that co J’s were being filed not The fact that they were being in filed They’re being filed on completely
Improper grounds and I think that if if If we if we expose that then that will Be what’s me place for the whole balloon To point out that that you know there Was actually never a promise of payment That’s correct Um just my final question is how big do You have any sort of estimate or sense Of how big the industry is how much cash Out there has been provided by these Yeah our estimates are that there’s Approximately twenty twenty five billion In outstanding MCA paper out there so It’s not a small chunk there’s there’s a Healthy chunk out there and you know We’re we second wind consultants we Strive to clean that up every day and And help enforce the contracts that These MCAS right and and do what we can To play our role in in the preservation Of businesses across the country have You had lucky enforcing those in Pointing out that this was actually Never alone so the be providers out of Luck yes yes as long as you just bring That well yeah you know we don’t just Have to bring it to light we really got To implement our strategies our article Nine sales to preserve the business Operation but as long as we get there And as long as we you know we engage Clients we have the ability to protect Them from these from these tactics that Are just completely aggressive and not
Backed by any contract that they write So thank you so much for explaining that I’m Eliza Ronald Fannin from Bloomberg News here at the TM a distressed Investing conference and I just spoke With Erin Todd Rijn of second wind Consultant [Applause] [Music] [Applause] [Music]