If you run a staffing business, payroll is not something you get to push to next month. Staffing firms must pay their workers on a weekly basis. Staffing owners are often all too familiar with how the cash flow gap between paying their workers and getting paid by clients can create a logistical nightmare. That gap is where a lot of merchant cash advances get signed. In order to get the payroll out every week, it means finding creative ways to get cash flow. At Delancey Street, we are a business debt settlement company, and we negotiate with merchant cash advance funders and other business creditors on behalf of owners who can no longer keep up. The short answer to the title is this: MCA debt relief protects weekly payroll by going after the debt that competes with your workers for the same dollars every week.
Merchant Cash Advance
A merchant cash advance (MCA) is an advance on a share of business sales. An MCA gives you cash up front in exchange for a percentage of your sales revenue. It is not a traditional bank loan; the advance is guaranteed by your future revenue. The business pays the funder daily or weekly until a certain amount is repaid. Because MCAs are less limited by lending laws than bank loans, funders can charge top dollar for that money.
Instead of interest, most MCAs use a factor rate, which can run anywhere from 1.1 to 1.5 and up. Take a $100,000 advance at a factor rate of 1.5. That means you’re paying back $100,000 times 1.5 = $150,000. Then come underwriting fees, administrative fees and more. MCAs tend to have high fees. As you can see, a traditional business loan carries fewer expenses than an MCA. And because an MCA isn’t a traditional business loan, repaying it on time won’t help you build a credit history. The fees are a bad deal for your business, and they can lead to more cash flow problems in the future.
So why do staffing owners take them? Because MCAs are not traditional business loans, they generally have much more lenient eligibility requirements. After you apply, you may have funding in as few as two business days. You generally do not have to put up collateral to secure an MCA. When payroll is due on Friday and a client invoice is still out, that is hard to say no to. It also feels like fast money that’s too easy to spend. What we all know is that this is short-term thinking that leaves the business at greater risk.
The Repayment Schedule
The problem shows up in the repayment schedule. You repay until the final dollar has been paid. And you’re going to pay it off daily or weekly. Meanwhile, staffing firms need to get payroll done every week without fail. This means that on Friday, your dollars have to stretch to cover both the MCA payment and your payroll. So who gets paid? The funder, of course. But when your business is all about people, making sure you pay your employees is the most important factor. Your employees will need their money to sustain themselves and their families. When the debits come first, you cannot maintain an operating balance that protects you.
You take that money and use it to pay expenses or close another advance, hoping to get back on track. Taking a second advance to cover the first is like putting a bandage over a hole in a boat. What you are trying to do is cover the sinking. It’s not hard to do, but if you aren’t actually fixing the problem you are still going to end up on the bottom of the ocean. Even if the merchant can find the money to repay that balance they owe, it doesn’t solve any of the underlying problems. Take another advance. Pay off the old one. Rinse and repeat. Just like a credit card cycle of debt, a merchant cash advance cycle of debt can spiral out of control. Eventually, you just run out of cards and end up drowning. For a staffing owner, that means you are out of ways to get cash. Not out of cash, out of ways to get it. When you run into a few of these advances, you could find yourself trapped in a vicious cycle of bad cash flow and repaying multiple high-cost debt instruments.
Business Debt Settlement
This brings us back to the question at the top of the article. Debt settlement for a business that can no longer afford to make the daily or weekly debit payments of a Merchant Cash Advance is where a third-party gets involved on behalf of the business owner and tries to negotiate with the funding companies for a low settlement of the debt. With debt settlement you are negotiating to leave a lender for less than what you owe. Settlement of MCA debt is different from an MCA Payoff. A payoff is a situation where the business continues to pay until the advance is repaid in full. Business debt settlement can help owners obtain a lower repayment amount than what would be required under the original repayment terms of the loan, which is what can free up room for payroll. They can also obtain a professional negotiation of their debt without the added stress of negotiating with multiple funders or lenders on their own. At Delancey Street, our advisors negotiate with funders and lenders for less than the full balance owed. We do not sell you another loan.
Debt settlement is not for everyone, but it can be a lifeline for staffing firms with weekly payroll. If a case cannot be won, or a cheaper option exists, we say so on the first call, and when bankruptcy counsel is the better path, we refer owners to an independent attorney.
MCAs are an expensive form of financing compared to traditional business loans, so it is important to carefully consider all of your business’s financial needs before deciding to pursue this route of funding. If you are already in one, once the crisis is over, you need to focus on the root cause of the cash flow gap. When owners call us, we look at the bigger picture of how the business works: income, expenses, overhead, payroll, profit, you name it. We understand that the debt needs to be serviced, but we also know that the debt limits growth and constrains the business. As a hiring firm, you should protect your people. Employee wages and benefits should be at the top of your priority list. A first consultation with us is free and confidential, and it is where we determine if we can help reduce your cost and make the payroll process smoother.
