Best MCA Consolidation Options for Declining Revenue

Stacked merchant cash advance debt became an even bigger problem during the COVID-19 pandemic. It endangers the business, and also the senior lender or factor. But that senior lender or factor can get the business out. A business under that much debt has options, and here’s how they get stuck, why the law is swinging their way, and how the senior lender or factor on the books can help consolidate or settle it.

Small business owners have been turning to merchant cash advances as a short-term borrowing option lately, but one MCA can quickly turn into several, a process known as stacking. The merchants then often default, close and disappear down the rabbit hole. With stacked MCA debt the spiral gets going when the business’ revenue drops, and a daily debit eats the cash flow. The owners take another advance to cover the 1st, and then another. Each one can be predatory. Yet even the deep MCA stack can be cut down or wiped out, though the success rate for the shop owner attempting to solve the matter once in the hole fell sharply during the COVID-19 pandemic.

An MCA is the bottom tier of the alternative lending pyramid, often the last resort a business owner turns to. Written as the sale of future receivables, the cash gets repaid by automatic daily or weekly debits. The reason why the sale-of-future-somethings language comes into play is that the provider says it bought a slice of your future receivables, not lent you money. It’s also drafted as a sale because a loan with rates often above 100% a year is usurious in most states, with providers also risking criminal prosecution.

New York Law

Even if the shopping mall or taco truck is in another state, most merchant cash advance contracts name New York as the place to fight, the law to follow and the courts to decide it. But New York law goes way back favoring the lender, and most of its courts treated a merchant cash advance as a true sale, no matter how clearly it read as a loan, so usury claims went nowhere.

That is beginning to shift, though. For the first time, the pending state and federal cases aren’t being rejected immediately when merchants argue that their merchant cash advance is really a loan. They are usurious loans, and the law will likely start to say so, in time.

In August 2019, New York passed a law that severely restricted the use of the confession of judgment or COJ, which is a contract a merchant cash advance provider can get a merchant to agree to when signing. The COJ lets the lender file a judgment against the merchant with no warning and no lawsuit. A lender could use it to enter judgment and collect whenever a merchant defaulted. It could even be filed against a merchant outside New York, who might never learn of it until they got the collection calls.

Now the lender can only file the COJ with a county clerk if the business is headquartered or resident in New York. Otherwise it must file a complaint, serve a summons and litigate. What is most important for you is that you now have the right to defend. Before you got no chance. You will now be served and scheduled. So the provider must spend time and resources. In order to collect, a winner must sue you again, this time in your home state, where that process is more expensive and time-consuming.

A First-position Lien on All Assets

Beyond the courts, there may still be a way out, because the real hammer holding down an owner is probably a senior lender or factor with a first-position lien on all assets plus a personal guaranty from the owner. If a business runs out of cash, the surviving party will probably be the senior lender or factor, who gets paid first from the remains of the liquidated assets. The merchant cash advance provider will get what’s left if the shop sells for more than the senior lender or factor needs, and it rarely does. That is leverage.

Since the law changed, MCA providers do not have a way to take the amount immediately, and they are more willing to work with you on a short-term or a long-term solution, especially during the pandemic. An out-of-state provider won’t relish the time and money it takes to chase you in court. It’s a lot faster and cheaper to give you a deal. It makes sense to ask for relief. If you get on the phone to your merchant cash advance company, you may be able to get some help.

Two Help Packages

Short- or long-term relief are the two help packages available right now. The first often cuts your daily or weekly payment by 50% to 75% for 30 to 60 days or more. A long-term relief package can discount the balance you owe by 25% to 50% or more. A senior lienholder has to sign on to the deal first, but that is also to your advantage. The senior lender’s approval is powerful. The MCA providers get that, and they’ll settle for some of the money.

Have a settlement to pay but not enough cash to pay it? A mezzanine lender can sell a sub-debt loan, often nine to 15 months at a reasonable return, that a business can use to close the deal. Cost of money goes down, repayment term gets longer. With a sub-debt lender, a senior lender has a client who is more likely to succeed, and that means less credit risk for the senior lender. The sub-debt lender, meanwhile, gets the chance to earn a reasonable return. The shop owner pays one lower-cost lender instead of a stack of daily debits.

Your senior lender or factor is in a strong position right now to help even with multiple advances, so long as you approach it before you miss your next debits. Do not wait for the stack to collapse. Talk to your senior lender or factor and ask about short-term relief or a discount payoff package. Check sub-debt to fund it if you can’t afford it out of pocket, and look to settle what you can.