If your business is carrying two or three merchant cash advances at once, you have probably heard some version of this pitch: “Let us remove your debts at a lower monthly payment while consolidating multiple advances for you.” Those are happy words to business owners in dire straits. What should you know about these debt relief offers? Where are the dangers in accepting a business debt consolidation loan? And which terms in the paperwork should make you put the pen down?
Merchant Cash Advance Contracts Are Stacked
A stacked merchant cash advance occurs when two or more advances are stacked on top of one another, making the business client responsible for multiple advances at once. If a business owner is operating in survival mode, it is not uncommon to try stacking and not fully understand the risks. Stacking is also a red flag for financial distress, so debt relief companies selling “debt consolidation” or calling themselves “business debt experts” are persistent in getting in touch with you. That’s why these offers are attractive to businesses that need help immediately.
To see why these deals go wrong, remember what you signed in the first place. A merchant cash advance gives your business a lump sum in exchange for a specified amount of its future receivables, and the repayment is structured through daily or weekly deductions from the business’ sales. The provider decides how much to advance by looking at your last few months of bank statements, and the money often arrives within 24 hours. That speed is a perk when the business has a cash flow emergency; but the longer that the business continues to be in emergency mode, the higher the likelihood that the merchant cash advance contracts are stacked. It is also why MCAs are popular with businesses banks hesitate to lend to, like cannabis companies, and with plumbing, electrical and HVAC outfits that need quick money to finish a project.
At first, debt consolidation loans sound very favorable. You have to pay your debt consolidation company a monthly payment, not the MCA providers, and that payment is lower than what you would pay the MCA funders. The company holds that money in a kind of pseudo-escrow account, and once the balance reaches a certain amount it starts negotiating with your funders. Your debts are unpaid, and all payments go to the debt relief company. No money is going to your funders. The debt relief company is not actually lending you money. Your cash is not paying down your debt as you pay these companies. This is because the debt relief company is just holding onto your money. The MCA providers know you are not paying your debt.
At bottom, you are still breaching your MCA agreement. The MCA funder can sue you. If the MCA provider agrees to renegotiate, then that is fine. But if the funder does not want to renegotiate, you are going to be dead in the water. It will usually sue you for breaching the contract, and the owner who spent months paying the consolidator instead of the funder will be left holding the bag. You can end up owing the funder all the future receivables you sold, and you have already paid the debt relief company money that did not go to paying down the debt. Nothing the consolidator promises changes the fact that what you promised in the agreement you signed is exactly what you owe to the funders.
Picture how this plays out. Six months into the program, the funder says, “You did not pay the debt, and I am not going to settle. I’m going to sue you.” What happened? The business owner just spent half a year paying the consolidator with no resolution in sight. The debts remain, and the company now has an added law suit hanging over its head. The business owner has a breathing spell, but the breathing spell lasted six months.
Avoid the Terms That Lead to Disaster
So the first term to refuse is the core of the deal itself. Do not accept consolidation offers that require you to stop making payments. Be just as wary of any program that makes you pay the debt consolidation company first before it pays your funders, that keeps your money instead of paying your debts directly, or that makes you wait for a particular balance to accumulate before any negotiation is done with your funders. Your business is already in financial distress. Is it really in your best interest to further avoid payments to your funders? If you are still tempted, ask how the debt relief company will negotiate with funders, and what happens to your money if a funder refuses to negotiate at all.
Second, consider what it costs to work with the company, and find out what they promise. Many of these companies suggest they can eliminate or reduce your payments to your MCA providers. The problem is not that it is untrue; the problem is that it is incomplete and misleading. Your payment to the consolidator may well be lower. Your funders never agreed to that number. They have a contract with you that spells out the amount they can expect, and they expect to get it.
Third, refuse the bundled legal defense. To deal with the lawsuits, many consolidation companies now offer third-party legal services that are supposed to protect you. Read that part of the contract closely. Too often these attorneys file boilerplate pleadings and boilerplate discovery responses, when a better, more careful response could have done more for you. Those papers leave out the facts specific to your case, and boilerplate defenses are usually ineffective. They may be filing paperwork, but they are not fighting for you. When those defenses fail, you can be liable for all of the future receivables, and the funder is entitled to assess attorneys’ fees and court costs in addition. Default fees and NSF fees can be added on top. What happened to that promise to give you legal defense in exchange for your money? You are actually worse off than you were before you got the consolidation loan. Don’t agree to accept “advice” from other attorneys hired by the consolidation company. If you get a lawyer, make sure you can trust that lawyer, and make sure you know what they can do for you.
In sum, if a consolidation offer lands on your desk this year, refuse the term requiring you to quit paying your funders, be aware of the risks of paying your consolidation company first, and don’t accept “legal defense” from others who are hired by the consolidator. Before you sign anything, read the MCA agreements you already have, talk to experienced legal counsel, and remember what you sold - and that, in the end, is what you must pay. It’s easy to slip out of the discussion when everyone feels so good about fixing the problem - but believe me, it’s not the end of the story. You can keep control of your business if you stay in the fight and avoid the terms that lead to disaster.
