When owners come to us behind on a bunch of merchant cash advances at the same time, the first question they ask is invariably: which funder should I pay first? Fair enough, but there is no one answer for everyone. The better question is why you are behind on a bunch at the same time, and what the whole stack is doing to your business. In our experience stacked advances are common, to the point where one Florida bankruptcy trustee who handles small business cases has said it plainly: nobody has just one, they all have multiple.
A merchant cash advance isn’t designed or marketed as a traditional loan. Because of that, there’s no interest rate in the contract. Instead, a funding company relies on a factor rate, usually 1.1 to 1.5, which is multiplied by the advanced amount to determine a fixed amount that you pay back in daily or weekly payments. And according to a New York debt relief attorney, it can in some cases end up being the equivalent of a 100% (or even 200%) annual interest rate. If you have more than one MCA pulling from the same account, these payments can add up very quickly.
MCAs have spread across the US since banks tightened lending after the 2008 financial crisis, and then hit a fever pitch in response to the pandemic and the withering of government-backed relief. Funders inundated social media with an endless stream of offers for quick cash and no in-depth credit checks. Analysts estimate the US market size around $20 billion. And it’s not just mom-and-pops that get caught: A Subway franchise chain with 43 locations filed for bankruptcy with a $1.4 million balance owed to an MCA with a 94% annualized return rate.
Stacks Get Started
Here’s how a lot of stacks get started. The business takes one advance. Can’t make the payments, so it takes another one to try to make up for the hole it’s dug itself into. Then another one. Stacking in this way has become increasingly common for businesses on the way to collapse. A Tampa bankruptcy attorney explained these advances are the last Hail Mary throw owners make to stay out of bankruptcy, and that he can’t recall the last case that didn’t have four or five of them.
If there is a Rule #1, before any question of order, it’s this: never pay off one funder by taking another advance. Because that’s how one advance turns into five, and how a rough month turns into a pile the business can’t carry. A land clearing and trucking company in Florida that filed for Chapter 11 listed 21 MCA deals totaling over $3.6 million, and told the court its bankruptcy was caused by accumulated MCA debt and aggressive collection.
Now think about what can happen if you miss a payment. The funder may declare a default, and that default can carry some expensive fees. There are also funders who will not settle. One bankruptcy attorney has said they’re very ruthless until you actually file a bankruptcy petition. Another said that trying to negotiate a restructuring with funders like that can be like dealing with the mob. And in a lot of cases, the owner is personally on the hook for repayment when the company defaults, so the heat can land on you, not just the business.
That is why choosing one funder to keep current while the others go unpaid may only decide which funder comes after you first. Before you make that decision, step back for a minute and take a look at the entire stack: how many advances you have, how much you owe on each, how much of your account is being pulled out of every day or every week, and whether you can actually sustain all that. The person you ask to help you, whether that be a negotiator or an attorney, will need that information first.
Bankruptcy Cases
When you have a string of advances, bankruptcy becomes something you start to say out loud. Bankruptcy cases listing debts to MCA firms jumped in 2023 and peaked with more than 230 filings, according to Bloomberg Law data. Attorneys say funders often aren’t there to fight a discharge in bankruptcy, and when they are, it can be an uphill battle for them to convince a judge they must be repaid. A trustee in Florida says she is loath to think of an instance when bankruptcy isn’t the best solution for a debtor with multiple MCAs.
Under certain circumstances, though, these deals may be considered loans (as opposed to a purchase of future sales), and here’s how one court handled it: A bankruptcy judge in Florida approved the restructuring plan of a fertility clinic that discharged the clinic’s MCA debts, noting that the debts were incurred more like loans than purchase agreements. However, according to a bankruptcy attorney in Ohio, that doesn’t mean it always happens or is automatic, although she thinks funders are losing the sale-versus-loan argument more often than they win it. Bankruptcy can also serve as a quick litmus test of how a funder will posture itself, and that matters, because often the owner is on the hook.
Then there are the claims made against the funders. A bankruptcy judge in Houston cleared the way for a trustee who is trying to liquidate an oil and gas contractor to go ahead with a lawsuit against an MCA funder, accusing them of violating usury laws and disguising a loan as a purchase of future sales. That does not mean all stacks end up in court, or that every owner should file. It means the funder’s paperwork is not always the last word, and it is worth knowing your options before you decide who gets your next dollar.
Business Debt Settlement
Bankruptcy isn’t the only answer. It’s not one we even handle. We are not a law firm; we’re a business debt settlement company. At Delancey Street, our senior advisors negotiate with merchant cash advance funders - even with stacked advances - for less than the balance owed. We don’t sell loans. And when bankruptcy, such as Subchapter V, is the better answer for you, we’ll tell you so on the first call, and refer you to independent bankruptcy counsel.
So which advance do you pay first? Our advice? Stop adding to the stack, get a full view of what you owe and to whom, and get some advice before the next payment bounces. Our first consultation is free and confidential, and if a cheaper option exists we will say so.
