So you’ve missed the latest payment on your MCA. What are your options? What happens if you fail to send the money? What does the MCA provider do? If it helps, you are not alone. At Delancey Street, a business debt settlement company that negotiates with funders on behalf of business owners, we hear these questions all the time. We’ll answer them below, but first, we need to review how a typical MCA provider works.
Not Technically Loans
A merchant cash advance is not technically a loan. Instead, the company providing the MCA buys out your future receivables. You’re essentially trading future income for money today. Once the MCA funds have been provided, the business repays a predetermined percentage of its debit and credit card sales until the advance (plus fees) is repaid. If your business has less-than-perfect credit, or if your revenue stream isn’t stable enough to qualify, you might not be able to get a traditional loan. That’s why people often turn to an advance.
The provider is buying your future sales, not lending you money. If that sounds like wordplay, that’s because it is. Merchant cash advances are not technically loans, so the provider usually isn’t required to get a license the way a lender is.
Then there is the cost. Let’s look at how this might work. Say your business needs $10,000 in working capital and an advance of that amount is granted. Let’s say that factor rate is 1.35. The factor rate is a multiplier used to calculate the amount that you will owe. To figure out the total amount owed, you must multiply $10,000 by 1.35. That means the total cost would be $13,500. Now, let’s say the MCA fund takes 20% of your sales to pay back that amount. That 20% is called a holdback percentage. The holdback percentage is the portion of your sales that the provider takes to repay the advance. Once the fees and repayment terms are translated into a rate, they can work out as high as 350%, and what was meant to be a short-term fix can quickly turn into a long-term burden. A holdback that looked manageable when sales were strong can result in a shortage of cash to operate.
Unlike credit cards or personal loans, merchant cash advance agreements are usually not considered consumer debt, so they’re not subject to many of the laws that provide protections to consumers on debts they owe to others. This means that federal laws won’t usually cover you for a merchant cash advance. It also means that, when collecting, an MCA provider may have a bit more freedom than, say, a bank collecting a past-due credit card payment. Its tactics can be more aggressive than what you may be used to with personal debt.
If a Payment Is Missed
So what can happen after a missed payment? Several things. The fine print in a merchant cash advance agreement can allow for penalties and fees to be issued if a payment is missed. Those charges can cut into your cash flow and potentially add a higher burden to your already high costs. Your credit is at risk too, since your credit score may drop if you don’t stick to the schedule on the merchant cash advance. Then there is the more serious end of the list. The provider may also move to seize business assets, or it can take you to court and sue you in an attempt to get repayment. There’s every reason to try and change this before it comes to that.
You Have Options
The good news is that you have options. You’re better off addressing the situation with your provider in a proactive way.
The first option is to negotiate. You should talk to your merchant cash advance provider and see if you can get more favorable terms. If you can, then you may want to negotiate the total amount owed, in addition to changes to payment schedules. When you call, stay calm and be realistic about what you’re offering. Have a plan for how you’ll meet the new terms you’re proposing. We know that’s not easy when you’re already squeezed, but you need to come across as someone who’s willing to work it out. Don’t lie about your finances either. If you would rather not have that conversation yourself, a debt settlement company can have it for you. At Delancey Street, we negotiate directly with the funder. The goal is to settle the MCA for less than the amount you owe. We handle stacked advances too, and we don’t sell you another loan.
A second option is to look for other financing. Ideally, that means a conventional form of financing, such as a bank loan. If you do qualify, new financing can help you pay off the advance. Be wary of covering the gap with another advance, though, because with an advance against income, you’re right back in the same situation. MCAs are known for high fees, and they often pull borrowers into a cycle of debt.
The third option is restructuring your budget so it can handle what the advance requires. That might mean increasing your monthly revenue or lowering your costs, canceling other projects or, if feasible, delaying non-essential work. Sit down with your accountant or another financial professional and figure out what you can do to make your current budget work. Look for every possible expense you can trim.
Yes, missed payments can have serious consequences. They can disrupt your cash flow, and worse, drag you deeper into debt. But there are options. Don’t ignore the problem. The sooner you talk to your provider, the easier it is to address and resolve the issue. If you’d like a second set of eyes, a consultation with Delancey Street is free and confidential. If a case can’t be won, or a cheaper option exists, we’ll tell you on the first call, and when litigation or bankruptcy is the better path, we refer owners to a vetted independent attorney, because we are not a law firm.
