A merchant cash advance can look like the easy way to get fast financing. At first, everything seems fine. The cash is on hand, and the payments don’t feel overwhelming. But then an unexpected expense hits, and the MCA payment starts to eat into your cash flow. That leaves you scrambling for money to keep the lights on, and suddenly the situation has spiraled out of control. Small business cash flow is rarely predictable, and your MCA payments are consuming the cash that you need for day-to-day operating expenses.
I’ve spoken with so many folks who find themselves trapped in an endless cycle of paying off their MCA. They don’t see a path out. They can’t pay it off. They wonder if they can even grow their business anymore. If that sounds like you, you have options. What you do next will determine how things turn out. Before you panic and make a rash decision, you need to take stock of your situation.
What Happens if You Stop Paying
Start with what happens if you stop paying. On a merchant cash advance, if you miss payments, you fall into default. And default usually means you’re in breach of contract - which opens the door to a lawsuit. Depending on the contract you signed, your business and your personal assets may be at risk. If you fail to pay on an MCA, you may be risking much more than the amount that you’re paying them. So pull out your contract and look for three things.
The first is a personal guarantee. If you signed one, you are personally on the hook for the advance. That means that even if the business closes down, if you haven’t satisfied your debt, the provider is coming after you. You could be sued directly, and if you don’t have the funds, they could even freeze your bank accounts or take property to cover what you owe.
The second is a confession of judgment. If you breach the contract, this clause allows your MCA provider to go straight to court to obtain a judgment for the amount owed without first notifying or hearing your side of the case. This essentially means you’ve signed away your right to defend yourself in court. Some states have outlawed the use of confessions of judgment, and different MCA agreements also vary on exactly where, and in which state, the funder can bring suit against you.
The third is a UCC lien. A UCC lien means that your MCA company can call your vendors and customers to collect directly from them. That can be embarrassing and affect your company’s reputation and credit score. So if you are having a hard time paying your MCA, you need to act fast. An attorney can explain the legal consequences for you and your business, and the answer may be to restructure the advance. There are three main ways to do that.
Reconciliation
The first is reconciliation. Many MCA contracts come with a reconciliation clause. This means that if your revenue drops, and you can no longer meet the payments, the provider has to renegotiate the advance so that you can actually pay it back. In plain terms, you give the funder proof that your cash flow is down, and then they have to change the payment structure so you don’t have to give them all of your revenue. Normally, you have to let the provider know right away and present the provider with the numbers that show your receivables have dropped. In practice, that means you pull out the contract, reread it and send the funder a copy of the relevant section with a professional letter saying that you need their help and that the contract instructs them to cooperate. Then the provider must lower your payment until your revenue reaches the original amount they wanted.
In some cases they will outright refuse the request. If the provider won’t help you, they might not only be breaking the contract, but the advance could be usurious, which means illegal. In that case, you might need an attorney to make them honor the contract for you.
The second option is consolidation. Debt consolidation is exactly what it sounds like. You take out an installment loan with a lower interest rate and use that to pay off the MCA. Now you can focus on paying down the new loan, with just one fixed monthly payment. It’s true, consolidation sounds great in theory. In reality, to qualify for a consolidation, you need good credit. And to have good credit, you have to make all your loan payments on time. Your credit score might be shot already if you’ve missed payments or had an MCA go to collections. If it’s that bad, consolidation probably isn’t your best option.
Settlement
The third option is to settle. Settlement refers to the process of negotiating with the funder to pay back less than you owe. Why would a funder agree? The funder is concerned about two things: They want to get their money back, and they don’t want to sue the business for the amount. A funder will agree because maybe it’s pretty obvious you can’t actually pay off the advance on the original terms. Instead of dragging you through court, which would be expensive and time-consuming for everyone, they’re happy to get a portion of the money back as soon as possible and be done with it.
Can you negotiate the settlement yourself? You can try, but be careful. Negotiating with an MCA funder is different than negotiating with other types of financing companies. It takes negotiation skills, effort and a deep understanding of the legal language of the agreement you’ll be signing. Many people find the process to be overwhelming, stressful and just plain time-consuming.
Be careful, too, about who you hire. There are a lot of debt settlement companies that claim they’ll negotiate your debt down to pennies on the dollar, and they reach out to business owners directly. They’ll ask you to pay a substantial upfront fee. Then they’ll claim to negotiate your advance with the lender on your behalf, when in reality they’re not really doing much of anything. But if anyone promises or guarantees anything, that’s a red flag. You could actually end up in a worse situation than before: judgments or liens that shut you down.
If your MCA is taking all your cash flow, don’t sit on it. The longer you wait, the worse it gets. And if you’re being sued or already have a judgment against you, or your contract includes a personal guarantee or a confession of judgment, get legal advice right away. Don’t wait until a judgment is entered or your accounts are frozen.
