Many business owners seeking working capital end up with merchant cash advances, but the upsides - easy money and lots of places to get it - can mask some ugly terms. Easy in, not so easy out. Experts recommend a three-step process for removing these agreements and replacing them with other types of funding.
If a company needs money now, MCAs are easy to get. More businesses are buying in. It’s a big industry with solid growth: valued at $19.73 billion worldwide and on track to hit $25.79 billion in four years.
MCAs were once a specialty product for retailers who could use their card receipts to borrow money, but now it’s a whole universe. Funding companies are underwriting companies on their bank deposits and offering advances based on future deposits. They review your monthly deposits and forecast your future deposits, which lets you borrow against that forecast. That opens the door for staffing companies, trucking companies, even manufacturers.
Many companies take advances without understanding the fallout of having to pay back a stack of cash advances. But there’s a way out.
Marc Mellman’s a 48-year veteran in the fields of law and finance, and has spent more than 20 years helping small and medium-sized companies get over financial hurdles. He now runs MCA Stacking Solutions, a new venture that only does MCA bailout work.
Stacked MCAs
The promise of fast money can turn into a trap. You can take out a second MCA to pay the first, and a third to pay the second. Now you have three cash advances and three very steep repayment schedules. Mellman often sees these companies coming in stacked. He’s seen a company saddled with 14 stacked MCAs.
Stack up enough MCAs and getting out is like falling down a rabbit hole. The harder you claw your way up, the more you sink.
For those trying to climb out of a stack of MCAs, the methods are simple. The formula remains the same for every client, Mellman says. His clients typically owe between $200,000 and several million dollars, but he says the approach is simple enough that owners with smaller MCAs can use the same formula without an expert’s guidance.
Renegotiate the Terms of a Cash Advance Contract
Here’s a secret that many owners don’t know: you can renegotiate the terms of a cash advance contract. Some of these contracts are set up with crippling daily repayment schedules that take an awful lot of money out of the owner’s pocket. Many firms are more flexible than owners might imagine. The key is showing that the current MCA payments exceed what you can afford.
Think lenders can’t be reasoned with? Think again. The providers sell tranches of their loans to investors who want a return. If they can’t keep the investors happy, they won’t be around to provide more MCAs.
When you’re trying to renegotiate terms with an MCA, they’re probably not your best friend, but in the end you’re a key client. They’ll complain, but they do not want to lose you. Ultimately, the lender needs the company to survive so they’ll get their money back.
Many MCA providers will offer a reduction on the amount of money owed if the borrower agrees to pay it all off quickly.
You can settle debt at a discount if you present a lump sum.
You can put together a lump sum of money by getting a personal loan. Or have an aunt chip in. Anything to get cash together. Liquid assets in hand give the borrower leverage. Mellman has negotiated discounts as low as 10%, and as high as 40%.
If your company has sizable accounts receivables, invoice factoring can free up a lot of cash. Invoice factoring lets businesses “sell” their accounts receivables. Mellman does a lot of his work in tandem with firms that provide invoice factoring, including AR Funding.
Keep This from Happening Again
When you’re treading water in debt, the only focus is on survival. But once you’ve regrouped, take a hard look at your operations. It’s important to explore what to change to keep this from happening again.
The best preventative measure against a stack of MCAs is having a trusted advisor or financial professional to look over your shoulder and warn about the red flags. Most business owners have both the IQ and the education to manage their finances. The smartest owners know what they don’t know, and a strong financial consultant can be a great asset on this front. It’s their job to know what the owner doesn’t know.
The best move is to have a flexible factoring line at your disposal. It means there’s no pressure to take on a stack of cash advances. A flexible factoring line is like a fire extinguisher. You don’t need it every day. But when you do need it, you need it in a big way. The money you never use is free.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
