By Chad Otar
Lending Valley Inc.
The COVID-19 pandemic's impact on our economy has been devastating. Forty-three percent of all businesses have temporarily closed across the United States, with nearly 70 percent of owners of those businesses unsure if they’ll ever be able to open their doors again—even after lockdown orders have been lifted. On top of that, the financial fragility of small businesses across the United States has never been more obvious.
Nearly half of all business owners with monthly expenses of $10,000 or more report they have only enough cash on hand to last two or three weeks before needing to take advantage of financing. Even then, they may not be able to make things work.
Seventy-five percent of all small business owners reported they had only enough cash on hand to keep their doors open for two months or less, and almost 75 percent of all small business owners are afraid that if things don’t change for the better dramatically, they won’t be in business by the time January 2021 rolls around.
We are getting into some dangerous waters here when it comes to the world of small business—but this economic downturn has had a huge impact on our national economy, too.
Recently, the United States disclosed that the second quarter GDP dropped by nearly 10 percent, representing one of the biggest contractions in U.S. history. Things look pretty bleak right now. Indeed, the world of business is ugly right now —especially If you are in the financing world.
Make no mistake about it, entrepreneurs all over the United States are terrified about what’s going to happen to their financial future as well as what’s going to happen to the businesses they have saved up for, worked so hard to build, and invested so significantly into already.
The initial CARES Act and the generous PPP program helped to keep businesses afloat through these particularly dark times, but we are running out of funding packages, and Congress doesn’t look like it is going to be able to deliver another actionable plan to fix our economy anytime soon. Financing companies that work specifically with small business owners—especially companies that deal in merchant cash advances (MCAs)—are particularly nervous about how things are going to shake out moving forward.
Not only are small business owners being squeezed left and right when it comes to keeping their businesses afloat, but consumers are also being pinched as well—many of them operating under state implemented stay-at-home orders that have shut down nonessential operations, cutting off significant revenue streams for MCA companies that were depending on that cash flow to keep themselves afloat.
MCA companies are looking around at the situation at hand and aren’t in love with the writing on the wall. Nobody could have anticipated a global pandemic of this magnitude wiping out the greatest U.S. economy in recent history, as is evidenced by the fact that a lot of these MCA companies do not have language in their contracts that specifically addresses global pandemics or major emergencies like this.
On top of that, MCA contracts require merchants to pay back the financing that they have leveraged with the receipts that they are bringing in as part of their day-to-day sales. But because of the pandemic and the lockdown orders, many of these businesses aren’t bringing in any new receipts. That means there’s nothing MCA companies can leverage to bring cash into their own operations.
For these reasons (and many others) MCA companies absolutely must begin to take steps that go beyond traditional reconciliation procedures to make sure they are protected as small businesses in the same way that the small businesses they helped with MCA financing are protected. For starters, MCA organizations need to be sure they aren’t receiving money as payment for their MCA packages that they are not actually entitled to. This could up a world of litigation that could devastate MCA companies. And it's why a lot of savvy organizations are already suspending ACH payments from companies that have no revenue coming in—just to guarantee that this doesn’t happen in error.
Ensuring they do not money they're not entitled to is also not a bad idea for MCA companies entering into new loan agreements with companies that have been negatively impacted by the COVID 19 pandemic (which is pretty much every company out there)—particularly if these companies are seeking assistance from state or federal organizations and relief packages.
Clearly, you don’t want to take money gained from a relief fund, count it as business revenue from the companies you have financed, and then find yourself in a world of legal hurt simply because your contract states that you will only receive payment from the accounts receivables that you purchased. We are already in enough hot water as far as our business landscape is concerned when dealing with the coronavirus pandemic.
The last thing you want to do is bring down a lot of regulatory scrutiny in this current landscape, inviting legislation or litigation that could do even more damage than COVID has already.
Press the pause button on servicing your MCA contracts whenever prudent right now. Wait until the waters clear a little bit before cautiously and strategically moving forward.
The following resources were consulted for this article:
Chad Otar is CEO of Lending Valley Inc. For information about the company, please visit www.lendingvalley.com. To reach Chad, send an email to chad@lendingvalley.com.
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