[funding pro]

I responded to a thread on the self promotion board and havent heard back yet, but since those are less frequently visited, I thought to bring it over here since it is less about the promotion and more about the underwriting of deals:

Originally Posted by Colt McDaniel

Yes. If a merchant has an existing advance or a loan we can still fund them as long as the advance is three month old.

What precautions are taken to make sure that:

A) the business can handle the repayment of the previous obligation along side your new financing?
B) you are not enabling/allowing the merchant to breach their contract with the previous funding company?


EDIT: for those not looking at this board, Colt is with IOU Central.

[Chambo]

I responded to a thread on the self promotion board and havent heard back yet, but since those are less frequently visited, I thought to bring it over here since it is less about the promotion and more about the underwriting of deals:

What precautions are taken to make sure that:

A) the business can handle the repayment of the previous obligation along side your new financing?
B) you are not enabling/allowing the merchant to breach their contract with the previous funding company?


EDIT: for those not looking at this board, Colt is with IOU Central.

Only problem is that more and more funders are putting terms in their contract that ANY funds taken after the fact may impede on existing contract and constitute default.

Spoke with John Konop today and he was quite adamant about that fact and the terms set forth in their agreements

[Finance1]

I think the big grey area in the legal department is the fact that an MCA is a purchase and sale of credit card receivables and firms like IOU are doing true loans. MCA's don't legally impede loans. Any merchant can go get a loan from a bank with an mca in place. A loan from IOU is no different.

[Sean Cash]

I think the big grey area in the legal department is the fact that an MCA is a purchase and sale of credit card receivables and firms like IOU are doing true loans. MCA's don't legally impede loans. Any merchant can go get a loan from a bank with an mca in place. A loan from IOU is no different.

I think this is where people get tripped up. Many MCA contracts that buy future receivables specifically state that the merchant is not allowed to obtain any type of financing at all as part of the terms and conditions. The contract essentially makes applying for a business credit card a breach of contract. It doesn't matter what IOU does or doesn't do. Sellers of future receivables are barred from loans too.

[Sean Cash]

This doesn't make my case for my above argument at all but I thought it would be interesting to post this anyway. This is from a 2009 First Fund's contract:

3. Seller’s Covenants, Representations and Warranties. Seller and Guarantor represent, warrant and covenant the following as of this date and during the term of this Agreement:

a) Seller represents that it is not contemplating closing its business.

b) Seller represents that it has not commenced any case or proceeding seeking protection under any bankruptcy
or insolvency law, or had any such case or proceeding commenced against it, and it is not contemplating
commencing any such case or proceeding.

c) Seller represents that the Future Receivables are free and clear of all claims, liens or encumbrances of any
kind whatsoever.

d) Seller represents that it does not intend to temporarily close its business for renovations or other reasons
during the next twelve months.

e) Seller shall not take any action to discourage the use of credit cards which are settled through its processor or
to permit any event to occur which could have an adverse effect on the use, acceptance or authorization of credit cards for the purchase of Seller’s services and products;

f) Seller shall not change its arrangements with its credit card processor in any way which is adverse to Purchaser;

g) Seller shall not change the credit card processor through which the major credit cards are settled from Approved Processor to another credit card processor or to permit any event to occur that could cause a diversion of any of Seller’s credit card transactions to another processor without Purchaser’s prior written consent;

h) Seller represents that as of this date, all Seller’s credit card sales and transactions are being processed exclusively with Approved Processor or are being deposited exclusively into a Dedicated Account;

i) Seller shall not sell, dispose, convey or otherwise transfer its business or assets without the express prior written consent of Purchaser; Seller shall not enter into a concurrent agreement for the purchase and sale of future receivables with any purchaser aside from First Funds.

j) Seller shall furnish Purchaser with the bank statements for its Bank Account and any and all other accounts to which proceeds from Seller’s sales are deposited within seven (7) days’ of any such request by Purchaser;

k) Seller shall unconditionally ensure that the cash Seller receives from Approved Processor attributable to the
Specified Percentage of the Future Receivables is immediately thereafter available to Purchaser for collection
via ACH from Seller’s Bank Account;

l) Seller shall not attempt to revoke its ACH authorization to Purchaser set forth in this Agreement or otherwise
take any measure to interfere with Purchaser’s ability to collect the cash that Seller receives (i) from Approved Processor attributable to the Specified Percentage of the Future Receivables or (ii) from the Dedicated Account;

m) Seller shall not close its Dedicated Account, or close or change the bank account into which Approved Processor deposits the Future Receivables to another account without Purchaser’s prior written consent;

n) Seller shall not conduct its businesses under any name other than as disclosed to Purchaser or change any of its places of business without Purchaser’s prior written consent; and

o) Seller represents that the information it furnished Purchaser in this Agreement and preceding application, including without limitation, Seller’s processing statements, is true and accurate in all respects and fairly represents the financial condition, result of operations and cash flows of Seller at such dates, and since the dates therein, there has been no material adverse change in the business or its prospects or in the financial condition, results of operations, or cash flows of Seller.

[Sean Cash]

This is interesting, section 9 of that contract prevents the merchant from working with any other MCA funder at all (including on a payoff) unless First Funds denies them for a renewal:

9. Sale of Additional Future Receivables; Schedules; Right of First Refusal. Nothing herein shall obligate either party to sell and purchase future credit card receivables; however, Seller grants Purchaser the right of first refusal to purchase any such additional future credit card receivables that Seller may wish to sell during the term of this Agreement and during the period ending ninety (90) days after termination of this Agreement. Under such right of first refusal, if Seller desires to sell additional future credit card receivables, Seller agrees to sell such receivables to Purchaser only, and not to any other prospective purchaser, so long as Purchaser purchases such future credit card receivables on terms that are no less favorable to Seller as the terms and conditions of this Agreement.

[Finance1]

Sean, I agree that the contracts have that type of wording but it's up to a judge to determine whether it's really enforceable. Let's be honest here, boiler plate language like that stand zero chance at being enforceable in court. It's a prohibitive covenant that goes against all accepted banking practices.

Secured lending has a pecking order based on collateral so that has some legal limitation. You can't "jump" someone's lien. Unsecured lending is strictly buyer/seller beware. Legally prohibiting a business from taking out a loan because you have an mca in place has no legs or ground to stand on.

If a company want's to say they have a secured lien against future receivables then you have to prove that the stacker is legally jeapordizing your encumbrance. I don't see how that case can be won.

[Sean Cash]

Well I guess that's what this all comes down to then right? Making your case against a stacker in a court of law and supporting that case with your contract language. Whether it be an advance stacked on an advance or a loan stacked on an advance...

Pretty much anything can breach the contract. That's what a lot of people are yelling about. Let's have someone sue and find out what happens.

[Sean Cash]

From a 2006 AdvanceMe Contract. Yea... I collect this kind of stuff.

II. REPRESENTATIONS, WARRANTIES AND COVENANTS.

Section 2.10. Working Capital Funding. Merchant shall not enter into any arrangement, agreement or commitment that relates to or involves Future Receivables, whether in the form of a purchase of, a loan against, or the sale or purchase of credits against, Future Receivables or future Card sales with any party other than Company.

Section 2.11. Unencumbered Future Receivables. Merchant has good, complete and marketable title to all Future Receivables, free and clear of any and all liabilities, liens, claims, charges, restrictions, conditions, options, rights, mortgages, security interests, equities, pledges and encumbrances of any kind or nature whatsoever or any other rights or interests that may be inconsistent with the transactions contemplated with, or adverse to the interests of, Company.

[Scott Williams]

I have seen one funder add an addendum to their contracts stating the merchant will be charged a fee if they take out additional funds from another lender. That also would be an interesting court case if the merchant was charged that fee and then sued the lender.

[Chambo]

If a company want's to say they have a secured lien against future receivables then you have to prove that the stacker is legally jeapordizing your encumbrance. I don't see how that case can be won.

Merchant starts bouncing payments to funder A due to increase pull from funder B.

So far it is only beating of the chest, but I know that both Jeremy Brown and John Konop are very serious about going after stackers.