The MCA Solution for Factors and ABLs with Harvey Gross — Second Wind Consultants

Harvey Gross and Aaron Todrin outline how lenders can benefit from UCC Article 9, by eliminating MCA debt which threatens a portfolio operation and its A/R.

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[Music] Today we’re here to talk about the Merchant cash advance problem as it Pertains to factoring in the factoring Industry and some of the things that That we have to be careful of and also a Possible solution to the MCA problem Harvey if you wouldn’t mind tell us a Little bit about the MCA history and how It’s really been causing issues and Problems in the factoring world Thank You Erin so the MCA merchant cash Advance industry started as the credit Card processing industry where companies Who are doing the credit card processing For volume also gave them the Opportunity to get up to six months Worth of be a previous sales up from Type of money no example would be if a Restaurant did a hundred thousand a Month usually then they would request a Six hundred thousand dollar advanced Against the next six months worth of Sales that credit card processing Company would then use the proceeds from The credit card processing and give them Money up front charge them an interest And then it was usually paid back within Six months through the MCA collections The interest rates are pretty high they Ranged anywhere from 40 to 120 percent Later on these credit card processing Companies more thing to the merchant Cash advance we’re instead of given the

Money using the credit card processing But collections they would give the Money based on a similar formula with up To six months and advanced sales and What they would do is then take ACH Swipes out of the bar with bank account To get paid back similar interest rates That everything else the problem is Caused in the marketplace for the Financial industry specifically factors In abl and some banks was they didn’t Enter into into creditor agreements so Therefore nobody knew this money was Being given to the clients at this high Interest rate Many times it made the contract illegal Because in the fakirs contracts it said I am use all sorts of money you have to Come to me first and then I would enter Into the credit agreement they weren’t Doing it and in many cases they didn’t Even take the ECC firing this unum Universal Commercial Code finally would Have at least given somebody an Opportunity to have a clue that they Were doing this So what transpired these last few years The MTA’s became very quick put money on The street at these high interest rates With long due diligence a lot of less Restrictions and many borrowers found Them safe itself going to them get their Money this did create problems for Lenders because they felt they were

Abundantly given money for the employee Using usual four C’s of credit etc now They can’t do that because it’s a new Player involved and because MCA is in Addition to causing that problem and It’s at a problem by doing what we call Stacking where more than one came in but More than one came in you had a multiple Problem you could I have away from two To six to eight NCAA’s given money for The same borrower and everybody Grantham For his bank account it has caused a lot Of Bank receives a lot of problems and Financial institutions who are looking For ways to cure this all that being Said aside for more laws that the feds In the states are putting in there are People now are going to try to address How do we ate off points how do we pet The secured lender and to get out of This opportunity and there became an Issue that you’re very much involved With turn it over to you for that Solution process thanks sorry so what You’re saying is that factors rely on Transparency in order to purchase Specific receivables and what the MCAS Are doing are That they’re mucking that up they’re not Providing the transparency they’re not Engaging in communications to make inter Creditor agreements and yet they’re They’re encumbering the same receivables Stifling the cash flow of the businesses

Who are doing the borrowing and Sometimes they stack one two three four Five of these things behind the factor Which is destroying the liquidity of the Business and therefore the ability to The to the factor to continue an honest Lending relationship so yeah that’s That’s that’s a huge problem and you Know no matter what we do even when Factors right provisions into their Contracts which is to say do not take Merchant cash advances we still see that Happening anyway and it’s it’s just the Reality of the situation that we’re in Right now with the the ease of of access To capital that they provide and the the Predatory nature at which they approach Business owners we’re still seeing it so One of the solutions here and I argue to Be the most effective solution is what’s Called the article not I transition when A business is faced with unsupportable Debt which is inevitable when it comes To merchant cash advances that are Stacked or even if there’s just one There is an opportunity to separate the Business from its debt through a Reorganizational transaction through What’s called article 9 of the Uniform Commercial Code and what this is is is a It’s a strategic short sale of business Assets for a distressed business Operation that transfers the assets with A third-party bona fide purchaser keeps

The business operation alive while Leaving the debt in the original Business entity and the logic behind This is is very simple article 9 is a Liquidation tool it is very simple it is A mechanism for secured lenders to Liquidate their collateral if there’s Not enough value for the liquidated Assets to pay the First position in full then the Subordinate lenders don’t get anything Just just as in any liquidation process What article 9 allows us to do is to Control the transaction bring all of the Parties together in a collaborative and Cooperative process that preserves the Business operation where before it was It was over leveraged had cashflow Liquidity issues and couldn’t operate Without taking on another MCA now we get To do a fresh start Reorganize the business through this Transaction and and and preserve those Jobs that are reliant upon the Business’s success so for us there are Really two main benefits that an article 9 can be used for the first one is to Deal with non-performing borrowers that Are already in a factors portfolio so Say for example you are a factor and you Have a distressed business owner that Has that has stacked MCAS despite the Contract language that you have Prohibiting that sort of activity you

Can walk that client through an article 9 transaction to preserve the business Operation when it would otherwise be Shut down and to preserve a client that Could that could be leant against in the Future with with a fresh balance sheet In first position the other opportunity To leverage article 9 for the benefit of Factors is to to change the lens at Which factors look at their deal flow When they’re evaluating businesses that Submit applications they don’t they Don’t approve every single one and a lot Of the you know a lot of the businesses That apply for factoring and and for Financing they get turned down because Of the balance sheet because of the debt Schedule well instead of turning away From those opportunities you you you Have the you have the opportunity to Walk those businesses through an article 9 transaction and and then on the other Side of that transaction have Have a fresh clean business operation That can be factored in first position Without any risk of merchant cash Advances stifling the business liquidity So between cleaning up a non-performing Full portfolio and widening the scope of Your deal flow simply by looking at at Your deals with a different lens article 9 can be a huge tool for factors when it Comes to conducting business for Distressed businesses conducting

Financing for distressed of business Operations so Harvey what are your Thoughts on the article 9 process in General well it sounds very good because Previously there was a perception that An article 9 was only in the benefit of A secured lender to take the possession Of the business away from the borrower Not given them any flexibility of Continuing and therefore the the lender Got paid out as best as he can using That article knowing this tool you’re Talking about is flexibility to either The existing secured lender or future Secured lender to come in so that there Is a continuation in some degree of a Working falling leuco possible and it’s Something that I think this thing Lenders when they’re going through their Portfolio before they try to just blow The business down give some forth is a Newer thought process on how to revisit Existing client and also if you’re Looking at a prospect this might be a Way for them to continue to operate Funding in a possible way the new Prospect would have to say no because The picture looks bleak so it gives you Two different opportunities to improve An opportunity here it’s certainly well I completely agree and it’s really Important to understand all the options That are available especially in times Of

Financial distress for the entire Economy not just on a business by Business basis but when the economy Takes a hit It’s it’s ideal for everybody to Understand their options and quite Frankly article mine has has benefits That no other option can present such as Chapter 11 bankruptcy which is fraught With its own issues assignments for the Benefits of creditor creditors which is Fraught with its own issues so you know Ultimately we just try and spread the Message of what article 9 is so that Everybody understands what all of the Options are and they can leverage those Tools to their best benefit so I think The awareness of this article knowing Opportunity to read place should be Known not just to the borrower Not just in the lender not just to Potential new lenders but trusted Advisors the CPAs the lawyers the Turnaround professionals that operate With this market to know that this is Another tool that they should consider To use I think this is something that Even new investors should have an Interesting because it’s a way of Putting money into what could be a Fairly new circumstance that could be Beneficial so there’s a lot of people Here that can benefit by knowing about This new procedure well thank you very

Much and you know we’ll keep these Conversations going thank you for your Time You

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