Debt Relief Specialist shaking hands with client

Merchant Cash Providers Hit With Class-Action Lawsuit

A proposed class-action lawsuit has been filed against Penn Capital Funding, MapCap Funding, and other merchant cash advance (MCA) companies that used a loophole in Connecticut law to collect unlawful debts and otherwise fraudulently obtain money. 

According to the complaint, filed in Manhattan Federal Court, a loophole in Connecticut law allows MCA providers to freeze out-of-state bank accounts of out-of-state businesses that have taken an MCA simply by serving process on a bank with a branch in that state. 

The MCA providers say the account freezes are justified because the small businesses attest under oath they owe the debt and are unaware of defenses to any claims. However, New York banned out-of-state confessions of judgment in 2019.  

The complaint claims that the defendants used the apparent loophole more than 180 times in 2021 against businesses that operate in New York, freezing their accounts without notice and using duress to obtain repayment. 

The class-action lawsuit also alleges that the defendants collected unlawful interest and then went dark after over-collecting money from these businesses, including lead plaintiff Avant Gard Senior Living, a California-based assisted living facility.  

The lawsuit is seeking certification of a class of persons in the United States who, on or after February 25, 2018, paid money to any of the defendants under a merchant cash advance agreement with an effective interest rate of excess of 25 percent.

Why This Matters

Whether the court will certify the class remains to be seen. However, this case highlights the longstanding abuses in the merchant cash advance industry. MCAs serve as alternative funding for small businesses that lack access to traditional bank loans and lines of credit.

A merchant cash advance is not a loan but rather the purchase and sale of future sales receivables in exchange for a lump sum of cash that businesses can use for working capital. However, MCA agreements contain onerous terms like confessions of judgment and personal guarantees that jeopardize the business owner’s assets should they default on the agreement.

Because MCAs are not loans, they are not strictly regulated at the state or federal level. However, New York has attempted to rein in the abuses of MCA providers by banning the use of confessions of judgment by MCA providers not domiciled in the state. The apparent loophole in Connecticut’s law has enabled the defendants to circumvent New York’s prohibition on confessions of judgment.

The Takeaway 

The outcome of this case remains unclear, but it is part of an ongoing trend of litigation and enforcement actions by the Federal Trade Commission against MCA providers. Meanwhile, you have options if your business is struggling under the terms of an MCA agreement

A properly structured agreement will include a reconciliation clause that requires the funder to restructure the repayment terms if the business experiences a receivables shortfall.  The best way to protect the business you worked so hard to build is to contact an experienced debt relief specialist.

Merchant Cash Advance attorney and client

FTC Bans Merchant Cash Provider For Deceptive Practices

The Federal Trade Commission (FTC) recently obtained a court order permanently banning RCG Advances, LLC and its owner from the merchant cash advance industry. The FTC filed lawsuits against RCG and other merchant cash providers in 2021 for deceiving small business owners about the terms and fees for financing and threatening violence when they did not pay.

“These defendants lied to small businesses about financing, stole money from their accounts, made violent threats, and gave false documents to the courts,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, in a press release.
The court order also requires RCG and its owner to make an upfront payment of $1.5 million and a subsequent payment of more than $1.2 million to refund the aggrieved businesses.

“This order bans them from the merchant cash advance business and requires them to return money to the businesses they cheated,” Levine said.  

Why Was RCG Banned From the Merchant Cash Advance Industry?

The FTC alleged that RCG Advances (and its owner) operated a merchant cash advance scheme since at least 2015. The agency’s investigation found that RCG deceived small businesses about financing terms and violated federal law in their communications. The alleged misconduct included:

  • Deceiving consumers about personal guarantees – The defendants falsely advertised that their cash advances required no collateral or personal guarantees when their contracts included those requirements.
  • Forcing businesses into confessions of judgment – The defendants required business owners to sign confessions of judgment, which allowed the defendants to obtain an uncontested judgment in the event of default. The complaint alleges that the defendants illegally used these confessions of judgment to seize assets improperly.
  • Providing less funding than promised – Businesses received thousands of dollars less in funding than promised due to undisclosed fees, despite the defendants’ marketing promises of “no upfront fees.”
  • Threatening businesses – The defendants allegedly made threatening calls if business owners did not make payments.

The FTC’s Enforcement Action Against RCG Advances

The court order permanently bans RCG from the business financing and debt collection industries. In addition, RCG must vacate any judgments against their former customers and release any liens against their property. Finally, the defendants must pay more than $2.7 million in refunds to businesses harmed by their actions. The FTC’s enforcement action follows a similar court order against RAM Capital Funding, LLC in January 2022, as we previously reported (here).

The Takeaway

The FTC continues to crack down on unscrupulous merchant cash advance providers. Despite the enhanced regulatory scrutiny, businesses that rely on these alternative funding products for working capital should be aware of the risks. And if your business is struggling under the terms of an MCA agreement, contact an experienced debt relief specialist who can help reconcile your merchant cash advance.

Merchant cash advance lawyer speaking with client

The Risk of Closing Budget Gaps with Merchant Cash Advances

Companies that provide goods and services often face budget gaps between the time a sale is made and payment is ultimately received. One way to cover these shortfalls is by taking a merchant cash advance (MCA). There are risks, however, not the least of which is defaulting on an MCA agreement. 

What Is a Merchant Cash Advance?

A merchant cash advance is an alternative funding product that is much different than a bank loan or line of credit. Because those traditional sources of funding are demands for payment, they are considered loans and subject to certain rules and regulations. By contrast, an MCA is a purchase of future receivables in exchange for upfront cash. 

Also, MCA agreements typically contain provisions that require the funder to restructure the payment plan if the business experiences a downturn. This means that a merchant cash advance is not a demand for payment, and, therefore, not considered a loan. The fact that MCAs are not loans means these funding products are not regulated like consumer loans; businesses have little, if any, legal protection in the event of default. 

How Does a Merchant Cash Advance Work?

A small business that accepts credit cards is a candidate for a merchant cash advance. Approval for an MCA is based mostly on cash flow rather than a good credit score. The application process is relatively quick, unlike applying for a bank loan that requires borrowers to provide financial statements, business plans, and other documentation.

An MCA provider looks at a company’s daily credit card receipts to determine whether the business can repay the funds on time. In short, the business sells a part of future receivables in exchange for immediate payment. An agreed-upon percentage of daily credit card receipts or “holdback” is withheld to repay the advance. 

Notably, the holdback amount is different from the repayment amount for the entire advance. The holdback percentage is based on:

  • The amount of the advance
  • The term of the MCA agreement
  • The average amount of the monthly credit card sales

In short, the more credit card sales a business has, the faster it can repay the advance.

A business using a merchant cash advance may repay 20 to 40 percent or more of the amount advanced, which is based on a factor rate. This rate is in the range of 1.2 to 1.5 but when converted to an actual annual percentage rate is much higher than rates on traditional loans and lines of credit.

What’s the Catch? 

Because the funder has access to the business’s daily credit card sales, MCAs are often pitched as “no collateral required.” However, a typical MCAagreement includes a provision known as a confession of judgment whereby the business accepts liability for the advance and waives any defenses. 

If the business cannot repay the advance, the funder can obtain a court judgment and begin levying the business’s assets. At the end of the day, relying on a merchant cash advance to cover budget gaps puts a small business at risk of defaulting, which could force the owner into bankruptcy.

The Takeaway

If you are considering taking a merchant cash advance, proceed with caution; don’t take the advance unless you’re confident that you will be able to repay it on time. And if you are already struggling under the terms of an MCA agreement, talk to an experienced debt relief specialist.

Client signing merchant cash advance document

What To Do If Your Business Is Hit With An MCA Lawsuit

Small businesses that face cash flow challenges often take a merchant cash advance (MCA) to cover their expenses. Businesses that get behind on payments may face an MCA lawsuit alleging a breach of contract.

Merchant cash advance lawsuits are often filed in New York because the state’s laws are more favorable for MCA providers. These companies often include a stipulation in MCA agreements that allows them to file lawsuits in New York, even if your business is not located there. If your business is facing an MCA lawsuit, it takes an experienced MCA debt relief lawyer to protect your rights. 

What Happens in an MCA Lawsuit?

The first thing to know is that your MCA provider may not need to file a lawsuit to recoup the advance. Many MCA agreements include a provision known as “confession of judgment” whereby you acknowledge liability for the advance and waive any defenses. This allows the funder to obtain a judgment against you and begin levying your business assets. 

If your MCA agreement does not include this provision, the MCA provider may decide to file a lawsuit. In this situation, you will be served with an official complaint and court summons. The paperwork may be served directly at your home or business or through the mail or email. 

The summons will also include a deadline, typically 30 days, by which you need to file an answer. If you fail to do so, the MCA provider will file a motion for default judgment and move to freeze your accounts and place liens on your property. For this reason, it is crucial to contact an attorney with experience defending businesses against merchant cash advance lawsuits in New York.

How An MCA Attorney Can Help

An experienced MCA debt relief attorney can take several steps to defend you against an MCA lawsuit, including: 

Determine Whether the MCA Provider Followed the Law

Even though merchant cash advances are not strictly regulated, you have certain rights under an MCA agreement. An experienced MCA attorney can identify any questionable terms under the contract and determine if the funder violated any debt collection laws, and, if so, move to have the case dismissed. 

Assess the Validity of the Lawsuit

Your attorney can also determine if the breach of contract lawsuit is valid. For example, your lawyer can force the funder to prove that you are liable for the advance or review the contract to determine whether a judgment that has been entered against you is valid.  

Determine Whether You Were Properly Served

If the court documents and summons contain errors or were improperly served, an MCA debt relief attorney can ask the court to dismiss the case. 

Help You Reconcile Your Merchant Cash Advance

A typical MCA agreement includes a reconciliation clause that requires the funder to restructure the payment plan if your business experiences a downturn. An experienced MCA debt relief attorney can help to show that your business has experienced a receivables shortfall and demonstrate that your business will return to profitability. Under the reconciliation clause, the MCA provider may accept lower withdrawals from your daily credit card sales and/or extend the repayment term until your receivables meet the initial projected target.

The Bottom Line

A merchant cash advance can provide your business with working capital in the event of cash flow shortages. However, defaulting can result in an MCA lawsuit. The best way to protect the business you’ve worked so hard to build is to contact an experienced MCA debt relief attorney today.

business partners looking over merchant cash advances

In Focus: Merchant Cash Advance Requirements

Small businesses that run into cash flow problems can obtain a line of credit with a major bank, provided they meet the credit criteria. For those that don’t, one alternative source of funding is a merchant cash advance (MCA). 

While the requirements for an MCA are not as strict as a traditional bank loan, there are risks, not the least of which are defaulting and the potential for business bankruptcy. Let’s take a look at the requirements for a merchant cash advance and what to do if your business defaults on an MCA agreement.

Merchant Cash Advance Requirements v. Bank Loan Requirements

Both merchant cash advances and bank loans provide a lump sum of cash to businesses that need working capital. However, banks evaluate businesses differently than merchant cash advance providers. 

To determine whether a business is a suitable candidate for a bank loan or line of credit, loans officers will consider:

  • The business owner’s credit history
  • The owner’s liquid assets
  • Collateral

But the application process is lengthy and complicated, which could make matters worse for an already struggling business. By contrast, an MCA provides a business with quick access to a lump sum of cash; and approval rates are higher than those for bank loans.

While the business owner’s credit score may impact the amount of the advance and the factor rate, it is not an overarching factor in the approval process. MCA providers typically require a business to be operating for at least 3 months and will review credit card sales and checking account deposits during that time. 

Other important factors in obtaining a merchant cash advance include:

  • The type of business
  • The business’s average daily checking account balance
  • Overdraft fees
  • Negative balances

Once the business is approved for an MCA, the repayment scheme also differs from a bank loan. In short, a bank loan is repaid at the same rate each month while a merchant cash advance is paid back based on a previously agreed-upon percentage of the business’s daily credit card sales.

What Happens If My Business Defaults On A Merchant Cash Advance?

A merchant cash advance may seem like a perfect solution to your cash flow problems, but defaulting on the repayment will put your business in a world of hurt. 

First, an MCA agreement usually includes a confession of judgment (COJ) whereby you acknowledge liability for the advance and waive any legal defenses. This means that the business can quickly obtain a court judgment in the event of default and begin seizing your business assets.

Also, it is becoming increasingly common for MCA providers to require business owners to sign personal guarantees, which means your personal assets – a home, car, bank accounts – will also be in jeopardy. 

But there is a way out of these dire straits. A merchant cash advance agreement should include a reconciliation clause that requires the funder to restructure the payment plan if your business experiences a receivables shortfall, as long as you can show your business can return to profitability.

The Takeaway

Applying for a merchant cash advance is easier than applying for a bank loan, but defaulting may force you to close your business. By working with an experienced debt relief specialist, you can reconcile your merchant cash advance and protect the business you’ve worked so hard to build. Get in touch with our team today.

Attorney meeting with client

States Take Aim At Merchant Cash Advances

Following the lead of California and New York, Utah and Virginia have passed disclosure requirements for commercial lending transactions, including merchant cash advances. While the New York and California requirements have not yet taken effect due to regulatory delays, more states are moving toward regulating revenue-based financing providers.

Utah’s New Disclosure Requirements For Commercial Lending Transactions

On March 24, 2022, Utah Governor Spencer Cox signed the Commercial Financing Registration and Disclosure Act (CFRDA) into law. The CFRDA applies to all commercial financing providers, including merchant cash advance providers, online small-to-medium-sized (SMB) lending platforms, commercial litigation funders, and other non-bank small business lenders.

Certain entities and transactions are exempt, however, including:

  • Depository institutions, their subsidiaries, and other entities regulated by a federal banking agency
  • Licensed money transmitters
  • Commercial financing transactions of more than $1 million
  • Commercial mortgages 
  • Purchase money obligations 
  • Leases
  • Commercial loans and open-end credit plans of $50,000 or more to motor vehicle dealers or rental companies

Unlike the New York and California laws, the CFRDA does not require an APR disclosure. However, covered commercial lenders must make the following disclosures:

  • The total amount of funds provided
  • The total amount of funds disbursed – if less than the amount provided
  • The total amount to be repaid
  • The total dollar cost of the transaction
  • The frequency and amount of each payment 
  • Whether prepayment penalties apply
  • Whether any portion of the financing was paid to a broker as a commission

The disclosure requirements apply to a commercial financing transaction consummated after January 1, 2023. 

Virginia’s New Commercial Financing Disclosure 

On March 7, 2022, the Virginia state legislature passed HB1027, a law designed to protect small businesses from merchant cash advances. The new law requires both sales-based providers and brokers to register with the commissioner of financial institutions by November 1, 2022. In addition, providers and brokers must:

  • Be authorized to do business in the state
  • Pay an initial registration fee of $1,000
  • Pay an annual renewal fee of $500

Whether individual employees of providers and brokers will also be required to register is unclear at this time. The new law also imposes disclosure requirements when a specific offer for a merchant cash advance is made to a business, including:

  • The total amount of the financing and the actual disbursement amount after any fees are deducted 
  • The finance charge (e.g. factor rate)
  • A description of all other fees and charges
  • The total repayment amount
  • The estimated number of payments, based on projected sales volume
  • The payment amounts, based on the projected sales volume
  • Prepayment penalties, if any
  • A description of collateral requirements, if any (e.g. personal guarantee, confession of judgment)

Virginia’s new disclosure law applies to revenue-based financing contracts entered into on or after July 1, 2022.

Why This Matters

Merchant cash advances provide funds to businesses that lack access to traditional sources of financing, such as bank loans and lines of credit. However, these alternative funding products are high risk because they contain onerous provisions like personal guarantees and confessions of judgment. In the event of default, the funder can seize both the business assets and the owner’s personal assets. 

Because merchant cash advances are not loans, they are generally not regulated by federal lending laws, but states are starting to rein in the excesses of MCA providers. Whether tougher disclosure requirements will protect small business owners remains to be seen. In the meantime, if your business is struggling under the terms of an MCA agreement, talk to an experienced debt relief specialist.

Client signing legal document

Invoice Factoring v. Merchant Cash Advance

As a small-business owner, you need working capital to pay employees and vendors, purchase equipment, and reinvest in business operations. Two funding options are invoice factoring and merchant cash advances, but there are differences between the two. 

What Is Invoice Factoring?

Invoice factoring is not a loan. Instead, you sell your invoices to a factoring company at a discount in exchange for a lump sum of cash. The factoring company collects from your customers, typically in 30 to 90 days.

If you sell products to another business and create a $10,000 invoice, for example, you may need cash to meet payroll before your customer pays off its invoice (typically in 30 days). While you can apply for a bank loan, you need good business and personal credit to qualify and must also put up both business and personal assets as collateral. Moreover, a traditional bank loan can take several months to close.

An invoice factoring company will agree to buy your invoice for $9,500 and charge a 5 percent factoring fee ($10,000 – $500 = $9,500). In a typical invoice factoring transaction, the factoring company will make an initial advance of 85 percent of the invoice value after deducting the fee. In this scenario, the initial advance would be $8,075 ($9,500 X .85 = $8,075). The factoring company then collects the invoice on the due date and provides the remaining balance owed to you ($1,425).

Factoring fees typically range from 1 to 5 percent, based on:

  • The invoice amount
  • You sales volume
  • Your customer’s credit rating
  • The factor type – “recourse” or “non-recourse”

In a recourse factor, you must buy back the receivable from the factoring company if the customer doesn’t pay or replace it with a current receivable of equal value. In a non-recourse factor, you are not required to buy back an unpaid receivable, but you will pay a higher factoring fee because the factoring company is assuming additional risk. 

In sum, invoice factoring provides immediate working capital that covers funding gaps caused by slow-paying customers. Factoring companies don’t focus on your credit rating, but rather the value of the invoices you are selling. So invoice factoring is well-suited for businesses that may not qualify for traditional bank loans. Finally, invoice factoring is unsecured financing, which means it doesn’t require collateral. 

Merchant Cash Advances Also Provide Small Businesses With Working Capital

Like invoice factoring, a merchant cash advance (MCA) is not a loan and provides a lump sum of cash for working capital. But that’s where the similarities end. In short, an MCA is a purchase and sale of future receivables rather than current receivables in exchange for an upfront cash advance.

The advance is repaid through daily deductions of your credit card and debit card sales over the term of the advance, typically 3 to 18 months. Also, a merchant cash advance is based on a factor rate, but this rate is expressed as a decimal figure rather than a percentage. Factor rates can range from 1.2 to 1.5.

For example, if you receive an MCA in the amount of $10,000, and the factor rate is 1.2, the amount you will repay is $12,000 ($10,000 X 1.2 = $12,000). But the actual factor rate e will actually be much higher because the funder will also charge an origination fee and monthly administration fees, which are added to the amount of the merchant cash advance.  

When the factor rate is converted into an interest rate or annual percentage rate, that figure could rise into the double or triple digits. In short, a merchant cash advance is high-cost alternative funding that could easily go into default.  In this situation, both the business’s assets and the owner’s assets are at risk because a typical MCA agreement includes confessions of judgment and personal guarantees, which makes merchant cash advances riskier than invoice factoring. 

The Bottom Line

If you have current invoices but are short on cash, invoice factoring can provide you with quick access to working capital. On the other hand, selling your future receivables in exchange for a  cash advance can also provide your business with much-needed funding. If your business experiences a receivables shortfall, however, you may default on the merchant cash advance, and the consequences will be severe, including the possibility of business bankruptcy. Contact us today to learn more.

Debt Relief Specialist and client

Alternatives to Merchant Cash Advances

Small businesses need funding to grow. While merchant cash advances can provide working capital for payroll, new equipment, remodeling, and other business investments, there are alternatives, from traditional business loans to microloans. Let’s take a look at some of the funding options available to small businesses. 

Term Loans

Term loans are well-suited for capital investments and long-term projects that require a predetermined amount of funding. Commercial banks are the primary source for term loans that typically involve monthly payments for 2 to 5 years or longer, and interest rates ranging from 5 to 10 percent. These loans have strict borrowing requirements and impose late fees and prepayment penalties. Term loans also require business and personal assets as collateral, which can be seized by the lender in the event of default. 

Lines of Credit

A line of credit is a convenient financing option when your business needs capital every so often. 

This arrangement gives you access to funding when you need it, up to your credit limit. Also, you only pay interest on the amount you use. Once you repay what you have actually used – plus interest, you have access to the full amount of financing again. Lines of credit are best used for short-term financing and working capital needs.

Business Credit Cards

Entrepreneurs who need capital for short periods of time often rely on business credit cards. To qualify, you need to have adequate income and good credit scores. At the same time, a business credit card may help to improve your business credit rating.

Vendor Financing

Suppliers or vendors may offer to extend payment terms. For example, a net-30 term will give your business 30 days to pay for purchased goods. This gives your business funds to develop a product or service, which can be paid back from future cash flow. Vendor financing may also help to establish business credit, which may help to qualify your business for additional financing.

Crowdfunding 

Crowdfunding for small businesses provides multiple paths to funding which allows your business to offer products/rewards in exchange for financial support or equity in exchange for an investment. 

Equipment Financing or Leasing

If you need equipment for your business, equipment financing or leasing allows you to pay for it over time through future cash flows. You can use this financing option to purchase or lease any physical asset, such as a restaurant oven or a company car. 

Invoice Factoring 

Invoice factoring involves selling your invoices to a factoring company at a discounted rate so you can quickly obtain financing. Invoice factoring can provide your business with working capital to pay employees and vendors, and reinvest in business operations without having to wait for customers to pay their invoices in full. 

Microloans 

Microloans are smaller loans that are an option for new businesses and startups that have a thin credit history and do not qualify for a traditional business loan. But these loans can be hard to find because many are only available in specific geographic regions. 

The Takeaway

There are a variety of funding options available to small businesses besides merchant cash advances. But if you have already taken a merchant cash advance and are struggling to meet the payment terms, you face the potential of defaulting, which will place both the business’s assets and your personal assets at risk. By working with an experienced debt relief specialist, however, it may be possible to reconcile your merchant cash advance.

Business partners review paperwork

DoorDash Set To Offer Merchant Cash Advances

DoorDash is getting into the merchant cash advance (MCA) business. The restaurant delivery platform recently announced the launch of DoorDash Capital to provide financing and working capital to restaurants. While this may sound like good news to restaurant owners, merchant cash advances are risky. 

If the business cannot pay back the advance, both the business’s assets and the owner’s personal assets may be at risk. If your business is struggling under the terms of an MCA agreement, you need an experienced debt relief specialist at your side. Let’s take a look at what DoorDash restaurants need to know.

What is DoorDash Capital?

The financing unit of DoorDash has entered into a strategic alliance with Parafin, a fintech business lender, to provide merchant cash advances to restaurants that participate in the DoorDash platform. But eligibility is based on sales performance with DoorDash. 

It is important to know that an MCA is not a loan, but rather the purchase of future receivables in exchange for upfront, lumpsum cash. The advance is repaid through a percentage of daily sales – typically about 10 percent – directly from the merchant’s bank account. The repayment term is usually 1 year or less, and there is no collateral required.

Why Do Restaurants Need Merchant Cash Advances

Restaurants that have been fortunate enough to survive the Covid-19 pandemic may still be struggling and in need of working capital. If traditional bank loans or lines of credit are not an option, a merchant cash advance can be used to fund all types of projects, including: 

Covering Daily Operations

Restaurants often rely on MCAs to fund daily operating costs, such as replacing and updating menus, purchasing new staff uniforms, or promoting the establishment by placing ads or hosting special events to improve sales. 

Front-of-the-House-Improvements

A merchant cash advance can also be used to upgrade dining rooms, tables, booths, bars, stools and replace simple items (e.g. plates, glassware, silverware). An MCA can also be used to revise the table layout or add an outdoor dining area, which seems to be a permanent feature even as the pandemic appears to be abating, 

Cutting Back of House Expenses

A restaurant can also use a merchant cash advance to focus on back-of-the-house expenses by upgrading water heaters, dishwashers, and cooking equipment to high-efficiency models or making other necessary renovations.

The Risks of Merchant Cash Advances for Restaurants

An MCA allows a restaurant to improve and upgrade without the restrictions that may come with a traditional business loan, but there are risks. Unlike a loan, merchant cash advances are not strictly regulated; a handful of states like California and New York have minimum disclosure requirements.

In addition, an MCA is not based on an interest rate, but rather a factor rate that is expressed as a decimal rather than a percentage. The factor rate is typically in the range of 1.2 to 1.5, but when converted into an APR (annual percentage rate) the figure can climb into the double or triple digits.

This makes a merchant cash advance a very expensive type of financing.

While DoorDash says it does not require a personal guarantee for an offer, merchant cash advances often include a confession of judgment (COJ) whereby the restaurant owner accepts liability for the advance and waives any defenses. This allows the funder to quickly get a court order to seize the business assets in the event of default. In short, a restaurant that cannot repay a merchant cash advance may be forced to close.

The Takeaway

Like other tech platforms, DoorDash is looking for ways to diversify its business model. Whether getting into the merchant cash advance business will benefit restaurants remains to be seen. In the meantime, if your restaurant or small business is at risk of defaulting on an MCA, contact an experienced debt relief specialist immediately.

woman looking over merchant cash advance agreement

Should I Consolidate or Refinance a Merchant Cash Advance?

Businesses that have received one or more cash advances to obtain working capital may need to consolidate or refinance expensive merchant cash advance debt. Determining which option is best for you requires the advice of an experienced debt relief specialist.

Why Businesses Need to Consolidate Merchant Cash Advances

Small businesses that do not qualify for traditional funding often take merchant cash advances. While this trend started after the 2008 financial crisis when money center banks stopped lending to small businesses, thousands of companies have taken MCAs during the Covid-19 pandemic.

While MCAs provide businesses with working capital to meet payroll, restore inventory, and cover unexpected expenses, the cost of capital is typically higher than 30 percent; payback terms are short, often less than 12 months. In some ways, a merchant cash advance is akin to a payday loan, but here the business puts future receivables on the line to repay the advance. 

Once the money is used, however, businesses often obtain another MCA to pay for the daily or weekly automatic payments of the first merchant cash advance, and things can quickly spiral out of control. But businesses have options, such as a business debt consolidation or a refinance that can help to eliminate the merchant cash advance debt.

What is Business Debt Consolidation?

A debt consolidation loan can help to pay off your business debt, including merchant cash advances. Business debt consolidation is similar to personal debt consolidation in that business debts are moved or consolidated into one loan. The benefits of consolidating business debt include:

  • A lower interest rate – A business debt consolidation can result in a lower interest rate, which means you’ll pay less to service the debt over time.
  • Streamlined payments – Business debt consolidation streamlines multiple monthly payments into a single payment, making it easier to manage your debt and helping to avoid missing payments or paying late.
  • Better credit rating – Consolidating business debt will improve your cash flow, allow you to stay current on payments, and help to raise your business credit score.

But it is important to remember that a business debt consolidation does not eliminate any debt, only moves it to a new loan. In addition, by taking a consolidation loan, you are starting a new loan, and the term may be longer than the debt you are consolidating. You may also end up paying more in interest over time, even if your interest rate is lower.

Refinancing an MCA is Another Option

If a business consolidation loan is not workable, refinancing an MCA is another option. 

A refinance differs from a business debt consolidation loan in that you can refinance a single loan with a better interest rate rather than combining multiple loans. This may be a better option if you only have one merchant cash advance.

Reconcile Your Merchant Cash Advance

Before you consider consolidation or reconciling a merchant cash advance, look to the MCA agreement. A properly structured agreement will include a reconciliation clause that requires the funder to restructure the payment plan in the event of a receivables shortfall. 

However, you must notify the MCA provider of a shortfall and prove that your business will return to profitability. By contacting and working with a capable debt relief specialist, you can explore all your options for getting out of merchant cash advance debt.