Turnaround Management Association CEO, Scott Stuart, interviews Aaron Todrin, of Second Wind Consultants, at the 2019 TMA conference.
The scope, practices and need for reform in the Merchant Cash Advance industry are discussed, along with the risk MCAs pose to businesses and the challenges they present to corporate turnaround professionals.
Second Wind Consultants offers solutions to businesses of all sizes that were previously available only to the largest corporations.
Whether your company is struggling beneath unsupportable debt or managing the challenges and risk of rapid growth, we offer consulting partnerships that create a path to success–without hourly fees.
When it comes to dealing with unsupportable debt, our RISE program provides a better way out, with no bankruptcy or new debt.
With RISE, we Reorganize your business, Insulate your operating accounts and clients, and Strategically Eliminate the vast majority of your debt. Reorganization is far more rational and ethical than bankruptcy, offering the optimal path to preserving the enterprise and the jobs dependent upon it while setting the stage for corporate turnaround.
When a business is in trouble, we know that most owners are faced with bad advice. That’s because attorneys are trained in one solution: Bankruptcy.
Avoiding the legal arena, and instead operating within the scope of business fundamentals understood by all parties, we preserve the underlying value of a business that bankruptcy would otherwise destroy.
Reorganization offers a win/win for all parties involved, including successful exits for owners and even maximum recovery for secured creditors.
Second Wind has saved 1000’s of businesses from the destruction of bankruptcy over the past ten years.
This is what we do for clients every day:
—Business Seller Financing and Renegotiation
—Conventional Loan Workouts
—Defaulted Mortgage Debt Resolution
—Franchise Agreement Renegotiations
—IRS 941 Payroll taxes and State Tax Liability
—Landlord Debt
—Merchant Cash Advance (MCA) Resolution
—Property and Equipment Lease Debt
—SBA Loan Workouts and Offer In Compromise (”OIC”) settlements
—Vendor Debt Resolution
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[Music] I’m Scott Stewart CEO of the turnaround Management Association and this is TMA Talks live from the 2019 distressed Investing conference in Las Vegas Nevada Today we welcome Aaron todrick president Of second wind consultants how will you Air I’m very well Scott thank you tell me a Little bit about you background a couple Minutes about yes you and how you got Into this business I’m president of Second wind consultants we are a Business consulting firm so I started as A bankruptcy practitioner and for a Number of years I worked with chapter 7 Chapter 11 cases and really grew tired Of watching businesses be needlessly Destroyed so we found an alternative Mechanism to preserve business Operations for distressed companies we Employ the article 9 transaction which I Think is the most efficient transaction Mechanism for any type of investment Vehicle and and we’ve been working with That and working with distressed Companies regardless of industry Regardless of region for the past 10 Years all over the country that’s Terrific Today we’re going to talk about merchant Cash advances or MCAS something I don’t Think a lot of people know about but Seems to have been getting a lot of a
Lot of attention lately once you tell a Fellow or listeners a little bit what MCA is are definitely so a merchant cash Advance in MCA it’s it’s an alternative Lending mechanism that’s that’s Absolutely exploded over the past five Years where it’s essentially like a Business payday loan these are groups That will give you $10 now for $20 in The future It’s it’s it’s a very fickle Beast they Do not they do not call themselves loans And they structure their paperwork so That they’re not loans and for that Reason they’re not regulated as loans so How does the money get advanced under Them so yeah It’s so it’s very easy to get an MCA for Four companies that that do not Otherwise qualify for conventional Lending or they’re in a tough financial Situation they need to seek alternative Mechanisms and MCAS have provided that That safety net for them so it’s it’s Extremely easy to get the loans you can Qualify for a merchant cash advance Within 24 or 48 hours they they look at The past three months of your of your Revenue and they come up with a number That they feel comfortable lending you And honestly it’s almost as easy as Pushing a button and within 24 hours You’ll have so much high debt Uncollateralized credit basically that’s
Correct That’s correct it’s collateralized by Future revenue future revenue but in Companies that are struggling to even Get to that revving that’s correct and And one of the ramifications of Companies that well well what are the Ramifications that you’ve seen of Companies who are using MCA as a Financing vehicle to try to survive and It sounds like a last-ditch effort at Survival yeah my mistake it’s it’s Definitely a last-ditch effort for Survival people clawing for cash to Maintain operations they’re already Faced with insolvency they’re headed in That direction and you know they take Whatever they can get the problem is the Fine print they do not read they’re Unfamiliar with what what these MCAS Entail for example daily withdrawals These get paid out of the company’s Operating account every single day Essentially a lockbox and the accounts Get swept it’s not a lockbox It’s it’s they have a pre-approved ACH Removal process directly out of the Operating account but the problem is is That that’s very dangerous because they Have access directly to your company’s Operating cash so they’re not lenders But they have access to the the Company’s cash on a daily basis which Gets ACH doubt that’s correct do they
Sign confession to judgment when they Make these loans or oh but they’re not Loans right well these cash advances yea They absolutely signed confessions of Judgment so right from the outset if Anything goes wrong they have the power And they do to immediately file that Confession to judgment and because they Have the direct access to your bank Account to your to the lifeblood of your Of your operation they can sweep that Within 24 hours with the filing of that Confession to judgment So how is this affecting businesses and And where are you seeing MCA is being Used most is it is there any particular Sector in the business community that’s Using MCAS or you’re seeing it just Broad-based in any desperate situation So it used to be based on companies that Do business on credit it’s net 30 terms Net 45 terms things like that but at This point we see it Widespread our second wind we work with Companies regardless of industry all Across the country and there is no Limitation to what we’ve seen every Everywhere from manufacturing service Agriculture MCAS do not discriminate on Who they lend against so how do you Rescue companies that have taken MCAS And up against the wall and it sounds Like there’s there’s no good recourse For the company and no way out right so
It’s it’s a good point there there is no Way out if we don’t do something and When you look at the the MCA Documentation sometimes we’ve seen Interest rates that amount to three Hundred and fifty percent four hundred Percent when you include all of the the Fees and the and the daily amortization Rates so you know it’s very difficult For a company who’s already faced with Financial struggle to get out from under These situations that’s when we really Need to conduct our article nine Transactions get shut that business down And find a way to preserve the operation Through a strategic short sale and Have you been successful at doing that And even when you do the strategic short Sale how does this kind of deck get paid Back if it gets paid back at all right So you know we we don’t know what to Call it so we keep on calling it alone And debt this is not debt if you think About it these MCAS are buying future Business right so if buying future Revenue future money if if that that’s a Risk for them so if the business shuts Down there’s no more revenue coming in So therefore there’s no default there’s No debt they’re not it’s not alone so The business owner of the distressed Company they don’t owe any money all They do is they promise that as money Comes in to pay the MCA their portion of
It so if money stops coming in the deal Is over so is this kind of like legal Loan sharking well I think that there’s A tremendous amount of abuse on on these Documents so we talked about a Confession to judgment that gets signed On the outset well if the business shuts Down I argue that there’s no debt There’s no default the business shut Down the MCA took a risk and they lost That time and they charge enough that They can they can incorporate that risk In their models and the truth is is that Their default portfolios still represent A small percentage of their entire Lending portfolio so the problem is that They’re treating it as a loan and They’re in and if the business shuts Down they look at what the deficiency Balance is and they go after the Personal guarantees so is it more so It’s basically used to cash advance at a Very high interest rate that the out Called on the lender for argument’s sake That the lender knows that never you Know in most cases that the company is Never going to pay payout so this is a Way to right now legally Allow the liner to effectively steal the Company well let me take a step back in Theory I have no problem with this Concept I have no problem with the Capitalistic world that we live in if The market bears a demand for high-yield
Short-term loans that’s okay but the but I do have a problem with the abuse of The collection tactics thereafter and if The business shuts down they lost on That deal and they’re not treating it Like that they’re treating it like a Loan and they’re going after the bounce So they’re not trying to steal companies They don’t do anything like that But they do try to squeeze the company Dry to collect every last cent when They’re going outside of the boundaries So what every fair to say this is kind Of like factoring on steroids it is it Is it is very it’s like the the cheap Dirty version of that so what do you Think the future of MCA is are well There’s been a lot of attention to the MCAS lately there’s been the shut that Most of the MCAS exist in New York and New York has officially shut down the Acceptance of CEO J’s being filed which Is great because the CEO jay is a very Antiquated legal mechanism that never it Was never anticipated that it would be Used for this purpose So they’ve stopped that which is which Is great there’s been articles being Written and very public news outlets There has been legal action there’s been Legislative action and that’s what I Really hope for is that legislation Catches up because they are way behind This industry and they’re running around
And it’s the Wild West out there of Alternative lending for companies that Are already in financial trouble so it Sounds like the future of MCAS might be In doubt it sounds like the regulator’s Might be looking hard at them and This form of lending might might be Short for life it might be short at Least in its current form again I have No problem with the concept as long as It’s regulated so if they if if they are Willing to take their losses when they When they lose and take their victories On their 350% APR is when they win then I’m ok with that and I think that’s Where we’re headed Aaron thank you so much this is very Insightful and very helpful and we look Forward to hearing more about your work In this area Erin Condren president of Second wooden consults I’m Scott Stewart CEO of turnaround Management Association At D I see 2019 live or good used to Come [Music] You [Music] [Applause] [Music]
