restaurant

How To Get Out of Merchant Cash Advance Debt

For new businesses that do not have a credit history and access to traditional sources of funding, one alternative is a merchant cash advance. Given that MCA providers take a significant portion of a company’s daily profit to recoup the advance, businesses often face cash flow shortfalls and are unable to continue operating. If your business has incurred significant debt because of one or more merchant cash advances, there are ways to get out of a merchant cash advance debt, here’s how:

Replace Your MCA with a Term Loan

One way to refinance merchant cash advance debt is through a term loan. These loans offer more favorable terms than cash advances, including:

  • Lower interest rates
  • Longer repayment periods
  • Monthly payments

Ultimately, a term loan makes it easier to manage your cash flow, however, some lenders place restrictions on the use of funds and MCA debt may not be eligible under some term loan programs.

Consider an Asset-backed Loan to Refinance Your MCA

An asset-backed loan is guaranteed by your business’s assets. These loans are typically collateralized by property, inventory, and personal guarantees. If you don’t pay back the loan,  the lender can seize these assets to recoup the debt. 

At the same time, an asset-backed loan allows you to refinance your merchant cash advance debt at a lower interest rate with a longer repayment term. Additionally, repaying an asset-based loan will help to establish your credit history since lenders often report to credit bureaus. 

Consolidate Your Cash Advances

If you are facing insurmountable debt from multiple merchant cash advances, consider a debt consolidation loan. Instead of making multiple daily payments to different funders, you have one loan with lower repayment interest. It is important to work with a lender experienced in the merchant cash industry that offers suitable loan products that make repayment easier and less expensive. 

File for Bankruptcy

If your business is facing too much merchant cash advance debt, consider filing for bankruptcy, but only as a last resort: bankruptcy can mean losing your business and will cause lasting damage to your credit rating. 

Reconcile Your Merchant Cash Advance

A properly structured cash advance agreement will include a reconciliation clause that provides remedies if your future receivables decline and you cannot meet the repayment terms of the cash advance. In short, this clause requires the funder to work with you to reduce the number of daily withdrawals until your receivables meet the original target. You are required to promptly notify the funder of a receivables shortfall, however, and provide documents confirming the decline.

The Takeaway

If your business is facing an event of default under the terms of an MCA agreement, don’t go it alone. Given that you may not qualify for a term loan or asset-backed loan, your best option is to reconcile your cash advance. By working with the debt relief specialists at ReconcileMyMCA. Com, you can get out of merchant cash advance debt and save the business you’ve worked so hard to build.

couple receiving merchant cash advance

The Pros and Cons of Merchant Cash Advances

Small businesses often need quick access to working capital for purchasing new equipment, meeting payroll, or making repairs. For those that do not have access to traditional sources of funding, one attractive option is a merchant cash advance (MCA). This article is a brief discussion of the pros and cons of a merchant cash advance.

What is a merchant cash advance?

Unlike a business loan that comes with a set repayment plan and interest charges, a merchant cash advance is based on a predetermined percentage of your future debit and credit cars sales. 

The merchant receives an upfront sum of money, minus certain fees, in exchange for a portion of future sales, and the advance is repaid through fixed daily debits directly from the merchant’s bank account.

Pros Of Merchant Cash Advances

The main benefit of a merchant cash advance is that it provides fast access to funds, whereas traditional loans can take weeks to obtain and come with strict approval criteria: good credit, a certain amount of provable revenue each month, and an established history. Once you are approved for an MCA, funds are typically deposited into your bank account in 24 to 48 hours. 

Another benefit of a merchant cash advance is that there are no fixed monthly payments. The advance is paid back as a fixed percentage of future sales, regardless of how low or high those sales are. Because sales tend to fluctuate month-to-month, many businesses struggle to meet monthly installments on bank loans. 

In addition, obtaining a loan from a bank or other lender typically requires the borrower to put up collateral. With a merchant cash advance, there is generally no collateral to be approved because the funder considers your current sales to determine how much to advance. It is worth noting, however, that it has become increasingly common for MCA providers to require personal guarantees in order to advance the funds. 

Cons of Merchant Cash Advances

While there are a number of benefits to merchant cash advances, there are also disadvantages. 

First, this is an expensive form of small business financing that involves higher rates and fees. Unlike an interest rate for a bank loan, a merchant cash advance is pegged to a factor rate which, when converted into an annualized percentage rate (APR), can be as high as 350 percent.

Another drawback to this alternative form of financing is that MCA funders recoup payments from your daily credit card receipts, which could lead to cash-flow shortfalls and jeopardize the future of your future. In addition, funders also place restrictions on your business operations, As an example, they may prohibit you from changing credit card processors or encouraging customers to pay in cash. 

Why This Matters

While a merchant cash advance can provide your business with quick access to working capital, this type of funding is only intended to be a short-term solution. Moreover, the consequences of defaulting on merchant cash are serious, potentially placing both your personal and business assets at risk. 

florist business that uses a merchant cash advance

What Types of Businesses Rely on Merchant Cash Advances?

For many small and medium businesses, a merchant cash advance (MCA) is a quick way to access working capital when traditional sources of funding are not available. Because an MCA is short-term financing (often payable in 6-9 months), it is typically the best option for short-term business needs. The main reasons businesses rely on cash advances include:

  • Business advertising
  • Filling gaps in cash flow
  • Covering unforeseen business expenses

Generally, businesses that typically need fast access to working capital include:

  • Retail stores
  • Restaurants
  • Beauty salons
  • Auto repair shops
  • Florists

Let’s take a look at how these small businesses can benefit from MCAs.

Retail Stores

Obviously, working capital is crucial for a successful retail store, especially in the contemporary retail landscape. Generally, a cash advance allows a retail owner to fill short term business needs such as stocking seasonal merchandise, reorganizing the store to enhance sales, and setting up new stores to grow the business. 

Restaurants

Restaurant owners customarily face two challenges: competition and thin margins. An MCA can help to finance needs such as purchasing new kitchen equipment, redesigning the dining room, accessing volume discounts from vendors, and establishing franchises.

Beauty Salons

Today’s beauty salons are not merely about hairstyling, but providing customers with a wide range of procedures. As such, a beauty salon owner may need a cash advance to purchase state-of-the-art equipment and new materials or modernize the space.

Auto Repair Shops

Given cars, SUVs, and other motor vehicles are loaded with technology (e.g. adaptive cruise control, automatic emergency braking, lane keep assist, GPS navigation, etc.) auto repair shop owners must stay up-to-date. A merchant cash advance can help an auto shop purchase new diagnostic equipment, restock parts and supplies, and cover unforeseen business expenses. 

Florists

As any flower shop owner knows, the business is cyclical and depends on seasonal and holiday activity. Small florists also face challenges from national retailers. A cash advance can help a florist cover expenses and survive when business is slow.

What are the risks of a merchant cash advance?

Although a merchant cash advance can allow a small business owner to tap working capital, MCAs typically contain onerous payment terms, complicated factor rates that translate to astronomical APRs, confessions of judgment, and personal guarantees. In the event of default, the MCA provider can quickly begin seizing the owner’s business and personal assets and push both the business and the owner into bankruptcy.

It is important to remember that a merchant cash advance involves the purchase of future receivables. Because it is considered a sales transaction rather than a loan, business owners are not protected by consumer lending laws. 

If your business is struggling to meet the payment terms of a merchant cash advance, contact the experienced relief specialists at ReconcileMyMCA.com. Our team can help explore all your options, including reconciling your cash advance with the MCA provider. Above all, we will work to preserve the viability of your business and avoid the devastating consequences of a default. 

business partners looking over merchant cash advances

In Focus: Beware of Merchant Cash Advances

While a merchant cash advance (MCA) gives a business quick access to working capital, there are a number of disadvantages. The cons of MCAs include:

MCAs Are Not Regulated

Outside of some disclosure requirements that have been enacted in California, MCAs are not governed by lending laws such as the Truth in Lending Act (TILA). Because a cash advance transaction involves the purchase of future revenue, it is not considered a loan. MCA providers typically make advances with exorbitant retrieval rates and business owners often experience receivable shortfalls. Since MCAs are not regulated, they are often enforced through confessions of judgment and personal guarantees, which puts both business and personal assets at risk of being seized. 

MCAs Are More Expensive Than Business Loans

Because the term of a merchant cash advance is usually less than one year, MCA providers are not bound by regulations on interest rate governing traditional lenders. As such, MCAs are far more expensive than other loan products. When the factor rate quoted by the MCA company (usually ranging from 1.2-1.5) is converted into an annual percentage rate (APR), business owners may be facing a rate between 60 and 200 percent. 

Shorter Repayment Periods

While cash advance repayments may involve daily deductions over terms ranging from 90 days to 18 months, MCA providers typically require repayment within 6-to-9 months, which can be a disadvantage for a business seeking the maximum repayment period. 

Restrictions on Business Operations

MCA agreements often include restrictions on how the business can operate, such as: 

  • Discouraging customers from paying with credit cards
  • Offering special discounts to customers who pay with cash
  • Prohibiting the business owner from switching credit card processing companies during the repayment period
  • Prohibiting the business from taking out other business loans until the cash advance is paid

The fact that an MCA agreement is a purchase and sale transaction means that the business owner is bound by the terms of the contract.

Why This Matters

While a merchant cash advance offers business owners with quick access to working capital, this type of short-term financing can also evaporate cash flows. On the other hand, MCA agreements typically include reconciliation clauses that allow for the payment terms to be restructured. 

If your business is at risk of defaulting on a cash advance, ReconcileMyMCA.com can help. Our debt relief specialists regularly negotiate with MCA providers to reconcile cash advances on behalf of our clients. Contact our office today so we can get started on reconciling your merchant cash advance.