This month’s business is quiet, but your MCA is still being debited daily and you just got an offer for more money from an MCA provider you’ve never heard of. When the funds are needed badly, it is tempting to accept the offer. But here’s the thing: don’t act on the first offer you get. Just because a funder sends a quick invitation doesn’t mean you need to rush into anything.
It’s called stacking when you take another advance while paying down your previous one. It is also known as taking multiple positions. It’s not technically illegal. The extra advances do offer an influx of cash in the short term, but they are a dangerous game.
So how did a stranger know to call? When you got your first advance, the funder put a UCC filing, a lien on your business, which became public record. This means any other funder can easily find it. Some brokers target recently issued advances to pitch business owners with offers of new money. And a stacking broker is just hoping to reuse the vetting and due diligence the first lender did to turn more profit. Pay attention to why you were even offered these deals in the first place.
The original funder sized your advance based on what your business could afford. A good funder wants you to succeed, because if it over-extends you and you default, it loses money. So why would you need a bigger advance than that? You don’t. But by doubling (or more) your position before clearing the first advance, you are taking a huge gamble on your business’s ability to generate new revenue. It is not in the funder’s best interest that you stack on top of the first offer, and it is not in yours either.
A merchant cash advance takes payment directly from your daily or weekly card processing sales. But if you take a second one, now you have two daily debit withdrawals pulling money out of your business. Two deals mean two separate payments and even more pressure on your cash flow. Those additional payments have to come from somewhere - likely cutting into the funds you are already using to operate your business. Because the rates are usually higher than other financing, if you double or triple your daily payment, it can have a huge effect on your cash flow, especially on slower days. What happens when those withdrawals end up exceeding the receipts you generate?
Stacking gets truly dangerous when the reason you want the second advance is that you are already struggling to make the payments on the first. Think it through: If you can’t afford the first advance, why would you be in any better shape to manage the second one? If you don’t already have a plan to pay off what you’ve already borrowed, you might be tempted to take on more cash to cover your fees and payback, which raises your level of debt. Soon you’ll be chasing another advance to cover another advance. That’s a trap - a vicious spiral of more bad deals. It is a slippery slope toward default, not to mention your increased long-term indebtedness.
There is one more risk owners miss. Some bank loans and SBA loans come with terms that stop you from taking other financing, including merchant cash advances. If you do, you may be breaking that contract, and the lender may call in the loan and demand immediate repayment. So be very careful if your loan agreement is strict on that point.
Ask About Refinancing
So what can you do instead when a slow month leaves you short? If there is no urgent need for the additional funds, it is okay to decline the second funder’s offer. If the need is real, start with the funder you already have and ask about refinancing. An MCA funder may work with you to refinance if you’ve made all your payments, especially after more than half of the original advance is paid off. Your original funder already knows your business, it knows your credit, and you’ve already proven you can pay the advance back.
Watch the math, though. If you take the new advance to settle the old one, and both have fixed factor rate paybacks, some of your new cash can help cover the unpaid fees on the old advance, meaning you’ll pay fees on the fees. This is known as double dipping. A refinance could wind up costing you more money than you think you are saving. A funder that doesn’t double dip will waive any fees on the current advance. Always ask for a line item breakdown of fees; the funder should be able to explain whether they will waive fees on a renewal, and if they don’t, then look for another funder. Waiving fees means more money into your business’s hands. Don’t be blinded by quick dollar signs.
A Viable Alternative to a Second Advance
But MCA refinancing isn’t the only option. If your business is doing better than it was when you took the advance, then maybe you can replace it with a loan from a traditional bank or lender. If the money is for buying or repairing equipment or inventory, equipment or inventory financing provides a viable alternative to a second advance, with the equipment or inventory itself as collateral. Payments are often set monthly, so you’ll have one monthly payment, not a daily withdrawal that nips at your business’s bottom line. If your business has many (especially expensive) invoices outstanding, invoice factoring gets you money that you’re already owed before your client pays it. The factor collects from your client and pays you the remainder, minus fees. There are no repayments, so your cash flow is less strained. A business line of credit lets you withdraw and repay as often as you like, and its monthly repayment schedule may be easier to manage than daily withdrawals. A single, carefully selected line of credit can provide a safety net without pushing your cash flow beyond its limits.
The next time a funder calls during a slow month promising money tomorrow, do not let that speed lull you into a false sense of comfort. Just because you got the offer for the funds quickly doesn’t mean you have to accept them. Don’t make a decision on the spot. Take a real look at your business’s income before taking a second advance, and make sure you have the funds to pay it back!
