How to restructure MCA debt

This article is to help you answer the question: how to restructure MCA debt. We see the same panicked calls every day. Clients taking 3-4 advances, stacked up, and now there’s an $8k coming out on a daily basis in ACH debits. The business is drowning. There’s so many questions on what to do. This post is the post many people wish existed, when they’re first starting their journey to learn about whether there is a way out. Many people on the internet are landing on pages that half-understand the mechanics they’re talking about.

This post is not a pitch. Our goal is to help you understand how the machine actually works, because the whole machine is the whole game.

First, get your head straight about what an MCA actually is?

This matters more than it sounds like it does. The MCA isn’t a loan. Legally, it’s a future receivables purchase. The funder gave you $50k today, in order to buy $70k of your future sales. That $70k is the RTR – right to receive – the purchased amount. The $20k difference is baked into your cost, and it’s expressed as a factor rate. 1.4 in this example, is the factor rate, not an APR. There’s no maturity date in a traditional loan sense, there’s no amortization, no interest accruing, that you can pay down early in order to save money.

Why does this legal distinction matter? It’s the funders biggest vulnerability, and your biggest leverage point. A real MCA contract is required to have a reconciliation clause, it’s language which explicitly says that your daily/weekly payment can be adjusted if there’s a downward spiral in your actual receipts. The whole, “this is a sale, not a loan,” structure legally depends on the funder taking the risk in case your sales decline. If there’s no reconciliation, then there’s no real risk transfer. The court can recharacterize the whole thing as a usurious loan. Funders know this, and that’s why their lawyers will get quiet when you raise this legal point. Step zero of any restructure is this: pull every contract you’ve signed, and read the reconciliation language.

Triage Before Your Negotiate

Don’t just start calling funders. First, figure out what you’re actually dealing with, because the right move is different – depending on deep you’re into the advance. For example, if you’re 10 days into an advance, that’s different someone stacked 5 deep, and in default. It’s crucial you map out each position, look at the funder name, original funded amount vs RTR vs current balance, the daily wekely payment and the frequency, whether you signed a COJ, whether there’s a personal guarantee, whether there’s a UCC-1 filed, and whether the reconciliation clause is present. The order you attack these in is not random, at all.

Here are your actual MCA restructuring paths, ranked by how much trouble you’re in

Path 1: You’re current, but the cash flow is killing your company. This is the best position to negotiate from. It’s counterintuitive, but funders are less motivated to modify when you’re on time, you’re a performing asset. Your leverage in this situation here is the threat of what happens if you stop paying. If your revenue is down, ask for a reconciliation adjustment. This is contractual, not a favor. Or ask them for a term extension, that lowers the daily, by stretching the RTR over more days. This doesn’t reduce what you owe, it just reduces the velocity of the daily payments. Sometimes that’s all you need to stop the bleeding. Don’t accept a modification which tacks on new fees, or resets the RTR higher. Sometimes, if there’s a new agreement, they’ll slip in additional clauses that screw you over immensely.

Path 2: You’re stacking and can’t sustain the daily. This is where most people are when they ask for help. You have multiple positions, and the combined daily debits exceed what the business generates. It’s like robbing Peter to pay Paul. Sometimes people take new advances to cover the old ones.  The honest move is here to stop treating all of your positions equally, and start arranging them based on leverage. It means that you deal with the funder in first UCC priority, who has a real, enforceable deal. If the funder has a litigious reputation, they have to get handled carefully. The junior MCA stackers who funded your business, made a riskier bet, and they know it. They’re willing to settle for less, because their recovery position in a collection fight is very weak. In practice, when you have multiple positions, restructuring looks like -modify everything. Often, you start by negotiating with the strongest position first, to something sustainable, and settle/aggressively restructure the weaker ones, at 50-60 cents on the dollar of the balance.

Path 3: You’ve defaulted, or you’re going to default. Once you’ve stopped paying, the dynamic flips. Now you have leverage, “You might get nothing, or might have to litigate for it.” They have leverage of UCC liens, the personal guarantee, and potentially a COJ. This is point where going solo is dangerous. It’s because a default-stage negotiation is a legal situation.

The negotiation itself is important

When you’re negotiating, lead with reconciliation, not hardship. Instead of asking for sympathy, focus on the legal agreement. “Per Section X, our receipts have declined, and here are 90 days of bank statements, we’re invoking reconcilation,” this is a contractual demand that they have to engage with. It’s important you bring documentation, bank statements, processor reports, etc. Funders will settle if you have proof, not stories. If you’re claiming you can’t pay, have proof.

Typically, in situations like this, lump sum beats payments and promises. Funders will take a real discount, if you give them certainty and immediacy. $30k wired Monday is worth more than $45k dibbled over a year to them. If you can put together settlement funds, even from a personal friend, that is more important than anything else. In addition, during this time, don’t lie about your bank statements etc. People will try to hide deposit accounts – do not do this. If the funder filed a UCC, they can find bank accounts, and getting caught moving around money to dodge the lenders can poison attempts at negotiation. Restructuring should be done from a position of honesty, and leverage, don’t commit fraud accidentally.

The thing nobody tells you

Some MCA debt relief companies are useful, particularly those that are attorney-affiliated like Delancey Street. While they can’t actually litigate, etc, they have resources. Restructuring doesn’t make a fundamentally unprofitable business profitable. It buys time, and lowers velocity, so a real business can survive a rough patch.