Hello, thank you for visiting Delancey Street. Today’s article, we’re going to talk about five things auto shop owners should do when their MCA payments are exceeding their daily revenue. Now, usually when this situation occurs, the problem is more serious than just having a bad sales day.
A typical MCA payment means you’re repaying through a percent of your future revenue or a daily fixed withdrawal, and this is often collected through the ACH or the credit card processor. For an auto shop, that means that withdrawal is competing with your payroll, your rent, your parts purchases, taxes, utilities, cash, and obviously your own personal salary. All of this is now adding additional pressure to the cash you need in order to finish vehicles already in the bays.
From our point of view, the immediate goal shouldn’t be to make one more payment at any cost. It should be to determine whether your auto body shop can actually remain operational while you pursue other remedies like a reconciliation, a workout, or settlement.
Measuring the real shortfall
Now, let’s talk about measuring the real shortfall before you start changing your payments. One of the things that is important to do is start with a **rolling cash schedule**, which covers at least the next several weeks. You should record your actual bank deposits by source. You should look at your expected customer and insurer payments. You should look at your payroll, your rent, taxes, parts orders, card processing fees, and every MCA debit.
It’s important you don’t confuse invoices issued with cash available. A completed repair may count as revenue in the accounting system, while the related payment may not have even reached your bank yet.
It’s important you calculate the problem over both daily and weekly periods, and that means calculating your overall daily MCA debt and the burden it’s having on your business on a daily and weekly basis. Often, we see that most business owners are able to plan a few days out, but when they start thinking about future expenses and future revenue, and then trying to reconcile that with their daily and weekly payments, there’s often a shortfall.
Factor rate and APR
Now, let’s be frank. Most businesses do not have the margins to afford an MCA, which is the equivalent of a 100% to 200% APR loan. Even though MCAs say a factor rate of 1.40, the issue is when you actually convert that into an actual interest rate, it can be much higher than a 1.40 appears to be on paper. It can actually translate to 80, 100, 200% APR.
And the thing is, when you calculate this problem over both a daily and weekly period, one negative day from, say, a credit card settlement timing can result in a deficit that impacts you for days or weeks, and that can create a structural problem.
Requesting reconciliation
Before you proceed with what to do to resolve this MCA debt, one of the first things you should start considering is requesting reconciliation. Now, an MCA is described as a purchase of future receipts, yet the actual collection method is probably going to be a daily fixed payment based on estimated sales. Some agreements usually contain a reconciliation process, which allows you to adjust when your actual revenue falls below the estimates. Often, in order to take advantage of this, there are going to be notice deadlines, document requirements, or limits on how often a request can be made. This is all going to be part of the contract you signed originally when you got the MCA.
Language in the signed agreement
The documented rule is the language in the signed agreement. It’s not a general claim that they tell you over the phone or over email. If you decide to go through this process, first find the contract, find your payment history, find your payment credit card processor reports, and recent bank statements. Then send a written request which cites the precise provision in the agreement and shows the revenue decline mathematically.
Collateral, guarantees, and collection routes
Now, if you decide that reconciliation isn’t possible for you, or if your reconciliation request is denied, the next thing you need to start thinking about is your collateral, your guarantees, and the collection routes before moving money. Don’t assume that closing an account, changing processors, or ordering an ACH block will eliminate the underlying obligation you have to the lender. Remember, you signed an agreement which commits you to paying a daily or weekly fixed payment. But if you decide that you have to take alternative measures, it’s important to first map out everything before you start taking any actions.
Every collection route
First, identify every collection route that the lender has available to them. For example:
- the ACH authorization
- the credit card processor split
- the security interest
- the personal guarantee
- any cross-default clauses
For example, if on the contract they have your other businesses listed, they can now go after those in order to collect on the payments that you have defaulted on.
Under UCC law, a secured party may, when the agreement allows or after default, notify certain account debtors to collect the money that is owed. And what that really means is if you do decide to default or if you do decide to miss a payment, the lenders are within their full legal agreement to contact your clients and vendors in order to divert any funds that are owed to you to the lender directly. This is part of the contract that you signed, and it’s one of the clauses that is very important when you are anticipating defaulting on an MCA agreement.
A race against the clock
Before you do anything, you should definitely go through reconciliation, but remember, sometimes that’s not enough. A lot of lenders prefer not to honor the reconciliation clause, or they’ll create a lot of hazards and roadblocks to make it so you are unable to invoke it in a timely manner. Remember, it’s a race against the clock, and what that really means is the lender would rather that you default on the MCA contract because then there are automatic provisions that favor the lender rather than them honoring the reconciliation clause.
If you only have a few days left of time before you’re going to end up defaulting because your bank account is going to go negative, this could create a race against time because if the MCA lender doesn’t honor the reconciliation in time, technically speaking, you have now defaulted.
Present funders with a workout
And if you’ve done the modeling, if you’ve done all the financial modeling, and you see that you just need to have a new workout, it’s important to present funders with a workout based on what the shop can actually sustain. Don’t go silent. It’s important to contact each funder, talk to them about what exactly your recent bank statements show, what your processor reports show, your current MCA balances, and then give them and show them a weekly cash forecast and a proposed payment the business can support after all your essential operating costs.
You can obviously ask for a temporary reduction or reconciliation or an extended schedule, but if you think that this may not be enough, then a settlement discussion might be in order. If you have multiple stacked positions, then it might be crucial that you speak to a company like Delancey Street who can help you.
It’s important to keep this proposal factual. Usually when we are negotiating on behalf of a client, we discuss whether the decline is coming from seasonality, lost fleet work, delayed insurance payments, technician shortages, or other lasting reductions in repair volumes.
Another daily or weekly advance
One of the most important things to do to avoid doing in situations like this is taking another daily or weekly advance merely to cover the existing withdrawals. Because MCAs commonly collect through daily withdrawals, replacing one debit with another can just increase the amount of pressure on your business.
Restructuring, settlement, and bankruptcy
Now, before you go further, it’s important that you realize that there is a difference between all the different avenues available to you, such as restructuring, settlement, and bankruptcy. If some sort of adjustment, whether it’s through restructuring or settlement, can’t create a positive cash flow for your business, it might be important to compare other formal options like bankruptcy.
Now, a negotiated restructuring can lower your periodic daily payments without reducing the principal. A settlement can reduce the amount paid but can require accumulated cash or trigger default remedies. It can affect future financing and create possible tax or guarantee issues that require the review of either an attorney or a professional business debt settlement company.
Bankruptcy can be the right answer, but it’s not *automatically* the right answer, and it shouldn’t only be considered after all accounts are empty.
Chapter 11 and Subchapter 5
Now, under Chapter 11 guidance, there is a Subchapter 5 process, which has eligibility requirements, reporting duties, plan requirements, and court oversight. If you decide to go through this process, you will need a business attorney in order to review your collection exposure, possibly a CPA or bookkeeper to test whether the shop can generate positive cash flow under a reduced burden.
A workout alone cannot save an operation whose ordinary jobs consistently lose money.
A permanent solution to your MCAs
If you’re considering a permanent solution to your MCAs, your first step should be to speak to a company like Delancey Street, who can help you get an out-of-court settlement and give you a plan to help you navigate this burdensome debt.
