You signed a merchant cash advance (MCA) a few weeks ago to cover urgent expenses. That’s common for business owners facing cash flow gaps or one-off costs. The approval was fast, and funds arrived quickly. Now you’re feeling the squeeze. The daily debits from sales hit your bank account, and the effective cost is running much higher than you imagined. The good news is that you don’t have to just accept this situation. Taking steps to fix this is nothing to be ashamed of. In fact, it’s responsible business ownership. Getting out of an MCA is possible, though it takes some creativity and research.
MCA contracts are known for details buried in fine print that are easy to gloss over when you need money fast. But the basic concept is simple. You get a lump sum of cash in exchange for that future sales revenue. Notice that an MCA is not the same as a traditional loan. You aren’t taking debt; you’re selling your future credit card sales for an immediate cash advance. That means that the deal is structured like a business transaction rather than a lending agreement. An MCA doesn’t follow the same laws as a typical loan. What you pay back is significantly higher than what you received, and the contract isn’t finished until the provider has been repaid in full, which can take a long time if sales are slow.
The Only Time MCA Advances Are Worth Taking
In fairness, an advance isn’t always the wrong call. Really, the only time MCA advances are worth taking is when a business needs cash really badly, has bad credit, and there’s no other loan available. MCA companies won’t typically look at your credit score like traditional bank loans do. The trade-off is paying a higher rate to get quick funding. The other time is if you need money immediately. Most loans take weeks to process, while MCAs were designed to put cash in an owner’s hands within a couple of days. Either way, you should only take out a merchant cash advance as a last resort, and even then, you should explore other options first. If you’re reading this weeks after signing, though, that advice comes too late. Is there a way out, or are you stuck paying back much more than you received? Yes, there is a way out. Here are the options, which you can use either as alternative financing or as leverage to get your provider to show some flexibility.
The first is to ask for more time. MCA providers are in business to get their advances back. They aren’t trying to keep you in debt for life, and most are willing to negotiate. You signed the contract, so you’re obligated to repay it, but that doesn’t mean they have to be heartless. Many MCA providers will extend the deadline if you make the effort to speak with them directly. It can work out better for them, too. So call your MCA provider, and ask them for an extended payment plan. Yes, just ask for an extended payment plan. If they say no, you can keep trying. After all, it can’t hurt to ask. When you do, explain the situation honestly, and ask if they can give you a longer payment period. You’ll probably end up paying a little more in total, but at least you’ll have more time to make your repayments.
The second option is to renegotiate the debt itself. Collecting on an MCA can be tiresome and time-consuming for the provider as well as for you, and that gives you some leverage. First, call the MCA provider. They might consider a lump sum payment for a reduced balance, or they might just give you a longer payment period. Or they might not. If they balk, remember that rather than paying for legal action and time in court, the provider may be willing to settle for less than the full amount owed because it will save them time and hassle. Whatever you propose, check your contract first for a “confession of judgment“ clause, which providers often include. When you give a confession of judgment, you lose the right to challenge any judgment issued.
Third, you can refinance with a term loan. Most business term loans have significantly lower interest rates than MCA advances. The tradeoff is that a term loan isn’t an advance that you get right away; instead, you’re taking a loan and using its proceeds to pay off your MCA. The provider gets paid in full, and you start fresh. Because debt consolidation is what term loans are mainly for, you can also fold other debts into one more manageable payment. This makes the most sense if your MCA charges more for late payments. The cheapest MCAs can actually become the most expensive when payments are slow. The catch is that term loans require more screening, and if you got an MCA because you had poor credit, a term loan might not be possible. Approval can also take a while, and you may pay some extra in the meantime, though many online lenders now fund loans quickly.
Fourth, if your business has a lot of assets, you could take out a new loan against one of them. There is a lower cost to using a business asset as collateral on a new loan. The risk is that the asset gets repossessed if you don’t make payments on time. This means you should be confident in your business’s ability to make that new loan’s payments. If you can, this is one way to get out of the MCA and pay it off at the same time. With an asset-based loan, the amount you can borrow is set by what those assets are worth. Say you own a car dealership with $100,000 worth of cars on the lot. If sales are steady, using the $100,000 in cars as collateral for a new loan would be a solid option. If they aren’t, the lender takes the cars, and you lose the very inventory you need to keep earning.
Fifth, consider invoice factoring. It isn’t really an alternative to your existing MCA, but if you are still in need of funds, you can use this approach to pay it off. Factoring is getting paid ahead of time for your receivables, the invoices that customers haven’t paid yet. Basically, the factoring company will give you cash in exchange for buying the right to collect on the invoices. Usually you’ll receive less than the full invoice amounts. But because factoring isn’t a loan, it doesn’t increase your debt. Just don’t sell so many invoices that your business is left without the money it needs to operate.
Merchant cash advances offer business owners a quick and easy way to access financing, but they are not always the right choice. In some cases, MCAs can do more harm than good, especially once a business is back on its feet and the advance is what’s holding it back. If the situation is so dire that you couldn’t avoid taking one, it would make sense to evaluate your options. If you are in a desperate situation or if you are struggling to keep up, then you do have the ability to try something different with your advance. These five options give you a lot more options and might even give you a little wiggle room. Ask for more time, renegotiate the terms, refinance with a term loan, take an asset-based loan, or factor your invoices. But if you can find a way to pay off that advance faster, you are far better off in the long run. At least you know there is a way out.
