Stacking is taking a second merchant cash advance to make the payments on the first. Then a third, and so on. By the time you get to advance five, you are paying out far more each day than the business can comfortably carry. Generally speaking, you will probably end up defaulting on one of your merchant cash advances at this point.
How do a lot of shop owners get so badly tangled up with merchant cash advances? Usually a bill comes due, expected or not, and the cash isn’t there. The owner opens his laptop, opens Google, and gets funded by an MCA. As one attorney puts it, MCAs are short-term money to solve a short-term problem, not working capital. Once you are using advance number two to fund advance number one, the short-term problem has become a long-term one. And then the cycle begins.
One seasoned MCA negotiator calls it “falling down the rabbit hole.” He has seen clients with as many as sixteen separate advances at once, totaling $8 to $9 million. Some funders openly advertise that they can take second, third, and fourth positions. And certain funders are friendly with each other, exchanging the merchant from one deal to another, earning a commission each time they refinance a cash advance to a different funder. It’s “more of a club,” that attorney says. So five is not unusual, and there are plenty of ways to get out of that hole.
Reduced Payment Plan
The first thing to understand is this. Most funders, the negotiator says, do not expect to collect 100% of the contract. They prefer the merchant to approach them before defaulting and explain “I’m having cash flow problems, I need a reduced payment plan.” They’ll usually agree, and often agree to the plan in 30-day increments. Why does the funder bend? They are usually backed by investors with deep pockets who want reports on cash flow every month. They want the funds coming in.
The difference between a bad funder and a good one can often be much more their attitude than anything in the contract language. Converted to an annual percentage rate, many MCA contracts run above 100%. One disclosure showed 922%. A responsible funder will go along with a change in payment in the event of a business delay. A predatory funder will accept no change and inflate the legal fee demands in response. With five funders, expect to deal with both kinds.
Settlement is possible, even with large balances. In one case the same negotiator handled, a client with a $20 million factoring facility turned out to have $6.5 million in MCA debt. The factor stood behind the negotiator. He spent the following year negotiating with every MCA provider and settled at 25 cents on the dollar. He says that the client was able to continue operating the business and a year later they were in fact in a better financial position. He is quick to call that rare.
You should never hide MCAs from your main lender or your factor. They will find out anyway: daily debits on bank statements, UCC-1 lien searches, sudden drop in deposits, levy notices and judgments. And if you tell them, ideally you should explain the reason you took the advance. A good lender may even be willing to support you while you negotiate with your funders, as that factor did. Always keep the lines of communication open.
Usury Laws
On the surface, MCA contracts don’t look like loans, since they’re structured as a purchase of receivables. But more and more courts are finding that if an MCA acts like a loan it’s a loan. At that point usury laws kick in, and the contract may be unenforceable. There are 26 states with usury laws. This is forcing bigger funders to change their approach. Their solution is to write MCA loan agreements under Utah law through a Utah bank, since Utah has no usury law. The MCA company doing it is still in New York and is still the entity making all the decisions and all the negotiations. Texas effectively banned MCAs by requiring that ACH debits can only be made if the funder has first priority on the borrower’s deposit account, which banks rarely grant. North Dakota has updated its usury law to potentially include MCAs.
Do not count on new laws. Ten states have some form of commercial finance disclosure law, but the most comprehensive laws are in New York and California. There have been bills introduced in five or six other states in the last 18 months, but most were killed in committee. One attorney who follows them is not aware of a single enforcement action under the laws of New York or California or any other state yet. Disclosure laws may help you understand the cost before you sign, but they are meaningless with respect to advances you already signed.
A Funder Goes Off the Rails
What do you do when a funder goes off the rails and suddenly sweeps money out of your accounts, locks up your receipts and levies your company? You need to respond fast with a cease-and-desist letter and negotiate or litigate. Sometimes it helps to pay part of a claim by one funder. That can unlock working capital that was attached. A reconciliation clause, where a company is repaying too much and comes back to see that they have overpaid and can reclaim that money, can come back to haunt you if it shows you underpaid instead. In New York, where corporate borrowers cannot bring usury claims, a firm can theoretically lay a civil RICO claim against a funder acting unlawfully to collect a debt. A UCC claim for bad-faith misrepresentation to account debtors is another route, and either one can put a funder on the defensive.
The advice to small-business owners with five Merchant Cash Advances: don’t get a sixth to pay the other five. Know, in simple math, what you are actually paying. Read the terms in plain language. Before going for more MCA money, approach an existing lender or someone higher up the food chain. Think about collateral and creative financing, even if it means waiting a week for funds. Act early, before you default. In any negotiation with a funder, you can say you want to get out of the deal completely, or you can simply negotiate a reduction in your payment. Speak with an MCA negotiator to figure out where you stand. Get help immediately, do not ignore problems. Remember, no one wants you to default.
