How do you restructure an MCA when you are being taken apart by the daily deductions from your merchant account? At Delancey Street, we hear it all the time. Business owners stressed to the max, wondering how they are ever going to repay the MCA that sucked them in because they needed cash fast. Business owners desperately in need of a cash infusion easily fall prey to the merchant cash advance industry. Merchant cash advance (MCA) is often marketed as a “quick hit of cash” during a temporary downturn. In reality, it’s the business version of a payday loan. Rest assured, you are not alone in your frustration. It can feel like you are stuck, and no matter how much you pay back, you will never get out from under the shark that is your MCA. The way out starts with understanding what you signed.
Commercial Transaction
It’s not technically a loan, it’s a commercial transaction, so it’s not regulated by stricter federal lending laws like the Truth in Lending Act. Instead, the funder gives the business a lump sum in exchange for a percentage of future sales or receivables, or fixed withdrawals from the business’ bank account, plus fees.
An MCA is one of the most expensive types of financing. APRs in the triple digits aren’t uncommon - 300% or even 400% is possible. In most states, the funder doesn’t have to disclose the APR, how much more you will be paying back than you are receiving in an advance, or the legal and financial consequences of defaulting on the loan. The paperwork can also be very confusing. Once they finally figure out what their funding costs really are, business owners wonder how they can pay it back. In fact, it’s better to think of an MCA in terms of cost, rather than interest rate.
With MCA debt, instead of a rate you pay a factor rate (typically between 1.1 and 1.5). The funder will review your time in business, your debit and credit card transactions, your type of business, your revenue, and your personal credit score. The riskier the business, the higher the factor rate will be. To find your payback amount, you multiply the advance amount by the factor rate. For example, a $100,000 advance with a factor rate of 1.3 gives you a payoff amount of $130,000. To figure your cost, subtract the advance amount from the total payoff amount. In this example, you’d pay $30,000 more than you got. Payback does not include administrative, underwriting and other fees, which can add up to quite a bit. There’s no savings if you pay early; all of the fees and interest are due regardless of how quickly you pay.
You typically pay an MCA back within three to 18 months by giving them a certain percentage of debit and credit card sales each day or week, or sometimes a fixed amount each day or week from your bank account, whether you made any sales that day or week or not. Business expenses fluctuate while fixed payments remain constant. The more you pay to your lender, the less money you have to cover operational costs. With that short repayment timeline, daily and weekly withdrawals can really hurt your cash flow, making it difficult to pay expenses like payroll. Some owners take out another advance to pay off the first one. Without knowing it, they’ve just extended their agony. That creates a cyclical debt trap, since now you have to make payments to two different advance companies.
Depending on the contract, you may not have the same legal rights (such as the right to defend yourself in a repayment dispute) or control over how you pay back an MCA. Paying back an MCA cannot build your credit score. Funders can also charge higher rates and try to avoid state usury laws, which set interest rate limits on many conventional loans. Some funders have taken advantage of the loose regulation to use deceptive practices, such as misrepresenting how fees and rates are calculated.
A “default” can occur if there is not enough money in your bank account to cover the payment, or if you haven’t made enough sales. The funder could decide to call the loan and take the entire amount owed from your account as soon as the money comes in. In some cases, this can happen after only one missed payment. With a “confession of judgment,” which many funders require, you give up the right to defend yourself if they sue for a breach. That means the funder could potentially take your business assets. If you signed a personal guarantee, it means that not only is the business you own potentially on the hook, but your personal finances could also be involved.
So how do you get out from under it? While restructuring is not the only option, the good news is that at least you have options. Restructuring an MCA doesn’t mean taking on another advance, feeding the cycle that got the business into trouble in the first place. Senior advisors at our business debt settlement company negotiate to settle the advance for less than what is owed. We do not issue another loan, and we do handle stacked advances. We aren’t a law firm, so if litigation or bankruptcy is the right choice we refer the owner to an independent attorney.
The first step to beating your MCA debt is to know the details. Pull out your contract and get the numbers, the factor rate, the total you owe, the withdrawal schedule, the default terms, and if there is a confession of judgment or a personal guarantee. Next you need to talk to someone. Our first consultation is always free and always confidential. If your case can’t be won or a cheaper solution exists, we will tell you on the first call. In some cases, filing for bankruptcy, such as Subchapter V, is the better option. When it is, we will say so and point you to bankruptcy counsel.
