When the merchant cash advance first hit your account, it probably felt like relief. After all, you really needed the funds — but it’s now back to a struggle. Every dollar you send on a payment is one less for your business. If you are struggling to keep up with the daily payments, you are not alone. MCAs are incredibly difficult to get out from under—but there are ways to regain control. Below are six strategies; I’ll start with the ones that usually work best, and end with the one you should use only as a last resort.
The first step is to go back to the MCA company itself, and to read your agreement before you call. Normally, they’ll list a percentage that is a portion of your sales, so if your sales have fallen, you can negotiate and request a reduction in your daily repayment. Communication with the MCA is essential if you’re wanting to renegotiate your contract. Start by initiating an honest conversation about your financial situation. Explain what happened and why you are behind on your payments. Ask if there is any way for them to temporarily work with you and how you could pay them back. If you can convince them that you are still worth financing in the long run, they may be more inclined to work with you instead of pushing for immediate payment.
Come to that conversation prepared. Have your business and personal bank statements ready. These documents give the funder a clear picture of your revenue, helping them understand your cash flow situation. The more information they have, the more likely they are to believe you are being honest. Stay calm and professional rather than aggressive or demanding. Don’t try to smooth anything over. Try to avoid game-playing here because the MCA has likely been through this before.
If the funder won’t budge, the second option is to raise cash by selling assets. Vehicles, machinery, inventory and real estate can all be converted into funds in emergencies, but any sale should not be a rash decision. If they’re not being put to good use, a sale may make more sense. Depending on your business, you may also own intellectual property, like patents, that another company might want to license or buy. Selling these also can be a good way to generate cash.
You don’t have to sell personal belongings to repay an MCA. Still, if you have valuable things you no longer wear or use, like jewelry, you could consider selling them for cash. Paying down what you owe can take some of the stress off while you run the business.
If you don’t have assets worth selling, the third strategy is to replace the advance with a different kind of business financing, such as an SBA loan or a business line of credit. Business owners turn to MCAs because there are few qualifications to meet and the cash comes quickly. Other loans may offer better terms, but they can take longer to process. The idea is that you take out a loan to pay off the MCA. When you consolidate, you can often replace the high-pressure daily payments with a less stressful fixed repayment schedule. Consolidating can lower your interest rate and make it easier to manage your finances. An MCA will drain your bank account through daily withdrawals, while a loan will have a set monthly payment. When you’re shopping for a new loan, aim for one that makes more financial sense than your original MCA. Research the best lender for your needs on a site like LendingTree.com or go to an SBA loan office. You may qualify for an SBA loan if you’re creditworthy, located in the U.S., and meet the agency’s business size requirements.
The fourth option is a personal loan. Opting for a personal loan is only going to work if you have good credit, which you can check and review if you are not sure. Personal loans tend to have a fixed interest rate and repayment schedule. Money will feel a little less scary, and cash flow will be more predictable. The catch is that while a personal loan will free your business from the burden of daily withdrawals, you will be using your personal credit to cover the repayment. It’s personal, meaning you’re on the hook for it, no matter what your company does. If you default on the loan, you face additional debt, and a default or even late payments will damage your personal credit score. If you still decide to take the plunge, apply to at least three lenders. Look for those that don’t charge origination fees; you want to avoid paying fees on top of what you already owe in debt and interest.
The fifth option is to work with an MCA debt settlement company. If you are unable to re-negotiate with the funder on your own, you may want to work with a settlement firm. They’ll take a look at your business finances and may request that you change banks so the MCA companies can’t automatically pull your payments. In practice that usually means you stop paying the funders for a while. This makes MCA companies more likely to negotiate a settlement. Sometimes that means paying less than you owe. Don’t expect this solution to be quick, easy or cheap. Not all settlement companies are the same, so compare the fees and services of each. Ask what you will pay, understand the pros and cons, and read the company’s contract carefully. Look into the debt settlement company’s reputation before you commit. Some lawyers specialize in merchant cash advance debt relief, but many will require a retainer before they take on your case. Before you shell out money, make sure to read customer reviews and inquire about the cases they’ve settled in the past. Either way, do your research. If a company cannot answer your questions or if you feel rushed or pressured, walk away and look elsewhere.
The sixth option, and the last resort, is bankruptcy. Do everything and anything you can before you file for bankruptcy. There are alternatives. It should be the last option to take. But at the end of the day, that’s what a bankruptcy is for; for businesses and for individuals, for when there is no way to pay off debt otherwise. If you plan on filing for bankruptcy, consult a bankruptcy attorney and make sure to disclose your MCA upfront. Some bankruptcy courts will view MCAs as loans, while others won’t, which can complicate the process.
Where Should You Start
So where should you start? Apart from talking to the funder, selling business or personal property is usually the place to begin, as long as it won’t hurt your operations or your financial stability. If the business is fundamentally sound and only facing a short-term cash crunch, a business loan can make sense too. The other options carry greater long-term risks to the business or to you. A personal loan is a risky option.
Look Closely at Your Cash Flow
Before you call a settlement company, look closely at your cash flow. You have to understand where your money is and where it’s coming from. Could you sell assets, increase revenue or cut payroll first? If you can realistically pay the debt without the settlement company’s services, maybe you should reconsider paying them extra. If settlement does make sense, weigh both sides. The biggest advantage MCA debt relief provides to your business is removal of financial stress. MCAs can be a vicious cycle that is difficult to escape and debt relief can put your business back on a sustainable path. It’s sometimes possible to settle for less than you originally owed. Drawbacks include possible negative impacts on your credit. Settlement companies and attorneys can charge high fees. Finally, it can be stressful to change business bank accounts or endure lengthy legal battles. There is no simple, one-size-fits-all solution, but this guide should get you pointed in the right direction. It takes creativity, planning, and a bit of budgeting, but breaking the cycle is possible.
