“What do I do? I signed up for a merchant cash advance, and I just don’t have the money to pay it back! Who do I call?” We’ve heard it before, and we’re still hearing it. If that is where you are, here is how we at Delancey Street would answer it. First and foremost, you must understand what you signed. Then you should do as much as possible yourself: explore other options for financing (preferably conventional), go to the provider and try to negotiate more favorable terms, and change the budget to make the cash advance fit. If these steps don’t work, and you can’t get and stay current, contact a business debt settlement professional for help as soon as possible. Being behind can have serious repercussions, such as penalties and fees assessed by the provider, damage to your credit score, seizure of business assets, and legal action.
Merchant Cash Advance
That is the short answer. The longer one starts with the paperwork, because it’s crucial to distinguish between two types of debt: a bank loan and a Merchant Cash Advance (MCA). A merchant cash advance (MCA) pays a business a lump sum now and is repaid with a slice of the business’s future debit and credit card transactions over a set period. This isn’t technically a loan, as the provider buys a percentage of the sales for a time period. Because of this little word game, MCA providers do not technically need to be licensed like lenders do. And they are usually not seen as consumer debt, so federal consumer protection laws usually don’t apply, and collectors may act a bit more cutthroat. These are often used by start-ups or businesses that can’t secure loans elsewhere due to poor credit or unpredictable income. You may also hear it called a business cash advance, a business advance loan, a business cash loan, business payday loans, a vendor cash loan, merchant payday loans, a vendor advance loan, a merchant advance loan, or even a small business loan. Whatever the name, the fact that it is business debt matters when you decide who to call. You need help that has experience with business debt issues.
MCA fees are extremely high (usually reflected as a factor rate), leading to a potentially endless cycle of debt. Many people and regulators feel MCAs should be outlawed; advocates say they keep small businesses afloat when no one else will. Take for instance the construction business that’s on an 8-week project, it is week 6 and due to unforeseen circumstances the company has hit a gas line and is now $8,000 over budget and its owner is unable to cover payroll. Unable to qualify for a conventional business loan, the owner takes a $10,000 advance with 20% holdback: i.e. the funder collects 20% of the owner’s credit card sales over the next eight weeks. With a 1.35 factor rate, the advance will be repaid at about $13,500. The fees and repayment terms can result in rates as high as 350%, turning a short term rescue into a long term problem. Combine the restrictive application process and contract with those costs and you end up with a highly risky and expensive way of funding a business.
The Options in Your Own Hands
So where should you turn first? To the options in your own hands. Look at other financing. Generally speaking, you want to do this with a conventional loan. Just keep in mind: many owners took an MCA because they couldn’t qualify for anything else. Talk to the funder, too. Let them know you are having trouble making your payments, and see if they can work with you on more favorable terms. Then rework the budget. Manage business expenses so that the business can support the financial requirements of the advance.
Professional Advice on Business Debt Settlement
Failing that, we recommend getting professional advice on business debt settlement as soon as possible. Why? To determine whether your business is in a high-risk position and explore a solution that works for you and the business.
That is the point where a call to us makes sense. We’re not a law firm. We’ll refer you to an independent attorney - if that’s what you need - for bankruptcy or if you’re facing a lawsuit, and that attorney will then be your attorney. We’ll only refer you to an attorney who we’ve vetted. We have senior advisors who negotiate with merchant cash advance funders for a lower amount of the debt that you owe, which can include stacked advances. We won’t sell you another loan. We do a free and confidential first consultation. If we don’t think we can win your case, or if there’s another option that’s cheaper for you, we’ll tell you on the first call.
So the first place to turn is your own contract and your own numbers, then the funder and your budget. When those are not enough, turn to someone who negotiates business debt and will tell you plainly whether settlement is the right path.
