Many business owners stack MCAs out of necessity. Perhaps you’re short of cash in order to keep the doors open and your employees paid. Regardless of how it happened, when you’re stacked you’ll likely end up in a cash flow crisis if you don’t take steps to find a solution. So, can you settle stacked merchant cash advances? In some cases, yes. There are a few routes to consolidation and settlement that you can take to resolve stacked MCA’s.
A Stacked Merchant Cash Advance
A stacked merchant cash advance is when you take out more than one merchant cash advance at the same time. Sometimes, the finance company might approve them but for a lower amount than they need. In those cases, the business might try to get another merchant cash advance to cover the amount they can’t get with just one. The first advance is called the first position. The second advance is called the second position. If there were a third or fourth, they would be the third position or fourth position. If a business takes out one advance, it has to worry about repaying one payment. With two advances, the business has to worry about repaying two payments. And so on. Each payment chews up more of the business’s cash flow. It is very hard to stay afloat with 3 different funders.
Is stacking even legal? Legally, you can stack merchant cash advances, but it is usually a risky move that your MCA funder may not like. No state or federal law stops you from taking a second or third advance. What can get you in trouble is the contract itself. The contract is the agreement between you and the funding company. Some funders include a clause that bars you from taking on any more financing until theirs is paid off. It’s up to the business to read the contract. We will come back to why that matters.
The real problem is what stacking does to the bank account. The money you need to keep things running is being sucked up by the merchant cash advance debits. This leaves a lot less cash to pay for utilities, pay employees, and keep the lights on. Marketing, inventory, advertising, product development and any plans to expand all get pushed aside. The merchant cash advances take up so much cash flow that not only is it hard to cover the MCA payments, but it is almost impossible to cover the daily expenses needed to run the business. When you have stacked, you lose the safety net of a cash reserve. It means that you don’t have a buffer if the business has a slow month or season. Let’s see what you can do about it.
Take a simple example. Acme, Inc. has two advances, each with a $10,000 balance and a $100 daily debit. One advance is in first position, and one is in second position. The company needs to pay $200 a day to cover both balances. Acme has 100 days to pay off the two advances. Together they cost about $1,000 a week and roughly $4,000 a month.
The Most Common Way Out Is a Consolidation
The most common way out is a consolidation, a new transaction that pays off the stacked advances. You have one daily debit, rather than 2 or 3. The daily debit for your new advance is lower than the sum of the old two, and the term is longer. And the goal would be to bring the daily payment down to the point where you could cover your daily expenses. Because the old balances are paid off, you also avoid the past dues and defaults that come with falling behind on them. A typical consolidation cuts the daily debit by about 50%, so Acme would go from $200 a day to $100. In this case, we’d go from paying $4,000 a month on the two old balances to about $2,000 a month on the new balance. Sometimes the savings are bigger, and stacked daily payments can come down anywhere from 35% to 75% without a default and without hurting your credit or standing. Consolidation is a great option, but it’s not always possible to get a consolidation.
Negotiate with Each Funder for a Lower Daily Payment
The second route is to negotiate with each funder for a lower daily payment. Before you call anyone, though, go back to that clause about additional financing. If your contract has one and you already took a second advance, you’ve almost certainly violated that clause. That gives the funder leverage: as soon as they find out you got another advance, they may have the option of declaring a default and demanding the full remaining balance immediately. So before you try to negotiate a lower payment for a stacked MCA, be aware of that danger. Getting the house in order first is the smart thing to do.
When you do call, tell the funder you cannot handle the daily payment. Be honest. Say you’re in a cash flow crisis and need the payment reduced to make things easier. Tell them that you are trying to avoid default, and that you would like to work out a reduced daily payment. Explain that you have two payments and that it is hard to pay them both. Give your full financial picture so the funder understands your situation. Expect questions and some paperwork. Be prepared to explain your situation as best you can. Each funder has its own policy on reductions, and each will look at your specific situation and at how you handle the request. You may have to negotiate with each funder until you get the desired result. A lower payment means less strain on cash flow.
Sometimes a business is only going through a slow week or two. In that case, they don’t need to pay off the stacked advances, just buy themselves some time to get through the rough patch. They need a grace period. A little breathing room, so to speak. Ask for a pause in the payments instead. It means that your daily debit will be suspended temporarily. A week or two’s grace gives you time to figure out how to meet your obligations. Funders are less restrictive about pausing debits than they are about lowering them.
If neither consolidation nor negotiation solves the problem, you can pay the advances off with other types of funding, which fully solves it. An asset based loan gets you cash and uses assets as collateral. But once you have cash, you can pay off any debts, including stacked merchant cash advances. Accounts receivable financing is the other option. You cash in your future invoices and receive a lump sum. Then you can use that to pay off the stacked advances. With either one, you may be able to stretch repayment to 24 or 36 months, which can significantly lower your monthly payments. Every situation is different, of course, and your options may not include all of these.
So, can you settle stacked merchant cash advances? Yes, in some circumstances. A consolidation, a reduction in the daily payment, a grace period, or paying the advances off with other types of funding are all ways to settle a stacked merchant cash advance. Consolidation is not always available, so negotiation and grace periods are viable alternatives. Remember, get your house in order first. Waiting to fix the stacked advances is never a good idea. Getting the MCA pay off sorted out will free up more cash for your business.
