How Due Diligence Helps Merchant Cash Advance Providers Avoid Debt Collection Headaches

How Due Diligence Helps Merchant Cash Advance Providers Avoid Debt Collection Headaches

As a merchant cash advance (MCA) provider, you offer businesses the key thing they need to operate: cash flow. In return, and like any other lender, you expect to be paid back on time.

But whether it’s because the economy has been hard on businesses lately or for other reasons altogether, I’ve been contacted by an increasing number of MCAs in California who aren’t being paid back. More merchants are defaulting, and it’s causing MCAs a lot of headaches.

MCA Due Diligence Is Key

If you run an MCA that lends to businesses in Southern California, my advice for you is this: invest more time in conducting due diligence on the business and its owners before you extend credit.

You'll be surprised how much you can find out in very little time—and what you find out can save you hundreds of thousands of dollars. With a simple Google search, you can uncover things that the business owner conveniently neglected to mention when applying for a loan. Or, you may uncover vital information that your current system isn’t set up to look for.

As one recent example, I represented an MCA that provided almost $1 million to a business owner. About half was paid back, and then the MCA sought out my law firm to help collect the rest.

I did a quick Google search and discovered that the business owner had set up many different “companies” in the past and used them to get cash. The MCA was unaware of this fact, and now he was doing the same thing to them. In another instance, the business owner had been convicted of several violent felonies.

Had either of these MCAs performed cursory research before lending the money, they could have made a different decision about whether to lend to this person or not, and they could have avoided spending time and money on collection efforts.

Due Diligence Doesn’t Have to Cost a Lot of Money

After years of doing debt collection work, I would recommend that merchant cash advance providers in California conduct deeper due diligence when providing loans of $50,000 or more. And, as I illustrated above, doing so doesn’t have to cost a lot of money or take a lot of time.

You can use an electronic background check system to run checks on merchants when they apply for a loan. Some MCAs protect themselves effectively by having a well-defined workflow that includes an employee running a background check. It may cost a few hundred dollars, but it could save the MCA hundreds of thousands.

MCAs can even hire an attorney to do the background checks for them. While you would have to pay some legal fees, those will pale in comparison to the money your MCA could lose by extending credit to someone who isn’t qualified.

Taking a Deeper Look at Merchants

These days, running a merchant’s credit report just isn’t enough to protect your MCA. Plenty of merchants have high credit scores, but plenty of them also have hidden histories of abusing MCAs and other lenders.

There are several steps you can take to go beyond the credit report. For instance:

  • Have someone on your team dedicated to running background checks
  • Develop a relationship with a lawyer who has experience with California public records (and public records elsewhere)
  • Get the merchant’s Social Security Number when they apply
  • Make sure you analyze all of the merchant’s bank accounts, not just the primary business account

In other words, think about due diligence in a holistic way. It will help you avoid collection headaches in the long run.

My Van Nuys Firm Offers Due Diligence Advice and Collections Services

The Law Office of Daniel N. Greenbaum represents merchant cash advance providers throughout Southern California. To talk to us about how we might be able to help your MCA, please call 818-809-2199 or send us a message anytime.