For a lot of small businesses, a merchant cash advance (MCA) was a fast way to get some working capital. That speed is why it remains so popular today. It only takes a short time for the lender to evaluate your application and fund your account, so plenty of owners use one to get through hard times. A cash flow issue is often the reason the borrower decided to look for a merchant cash advance in the first place. But the truth is that many businesses simply can’t afford to make those payments on time. Unfortunately, it is easy for an advance to turn into a nightmare. When it does, you are caught in what we call the merchant cash advance trap.
Five Ways Out of an Advance
So what do you do if you start having problems making your MCA payments? There are a lot of good answers here, but the details depend on the specifics of your contract. Below are five ways out of an advance that is dragging your business down.
The first step, if you feel yourself starting to fall behind, is to contact the MCA provider before you start missing payments. Explain your situation, and you may be able to negotiate a lower daily payment that will work better for you. This may seem obvious, but don’t skip it. These advances often come with large daily payments, and they can be very difficult to escape, so it helps to start with whatever relief you can get. MCA contracts contain a reconciliation clause, so you have a legal right to ask for a reconciliation, but there is no guarantee that an MCA company will comply.
If the funder refuses to bring the payment down to something reasonable, denies that you have any right to reconciliation, or you are simply nervous about approaching them, contact a lawyer experienced with MCAs. An attorney who knows lending law and your rights can sometimes negotiate a more reasonable payment, as well. They can also make sure any new terms are affordable and legal.
The second option is to replace the advance with a term loan. Factor rates are high, and the daily payments can quickly pile up to huge amounts. Some businesses end up paying the funder double, triple or more of what they originally received. That might be palatable in a tight squeeze, but it is not a good long-term solution. A term loan is a better solution. Just as it sounds, a term loan is a standard business loan with a fixed amount that you repay in a set number of installments. You can take out a term loan, use the proceeds to pay off your MCA, and then you have a more reasonable monthly payment. This is a better deal than an advance because the interest rates are lower and the payments are consistent. The repayment period is longer, too. The idea is to exchange high-cost, daily payments for the lower payments of a term loan. The catch is that you need some good credit scores and financial history, which a lot of entrepreneurs don’t have. Lenders will want to see all your company’s financial statements, for the last few years, and proof the business has been reasonably profitable. If your scores are good, a term loan can be a more manageable way to get out of an MCA. These loans come in various sizes and interest rates, so get advice on which kind suits your business.
If you lack the credit or the time for a term loan, the third option is an asset-backed loan, which suits businesses that have assets they can leverage for a loan. In this financing method, you use equipment or other assets as collateral. For instance, if your company owns a building with equity in it, you can use the property to apply for an asset-backed loan. Because the lender can take the asset if you default, the loan has less risk and therefore a lower interest rate. The repayment term is often longer, too. An asset-backed loan can provide a little more breathing room. It won’t get you out of debt. You are going into debt to cover debt. What it can do is replace daily MCA payments with something more manageable. As long as you can pay your loans on time, you can keep your asset. If you default, you will lose it.
The fourth option is bankruptcy protection. If your business took on an MCA because it needed funds to survive a hard stretch, bankruptcy may not be out of the question. The different types of bankruptcy lead to very different outcomes, from a total shutdown to a rebound as a stronger company. Some business bankruptcies involve selling everything and closing down, but it is possible to reorganize a business and keep it going. Depending on your situation, you may be able to wipe out much of your debt, protect your assets from seizure, and keep your business and rebuild on a stronger financial foundation. A filing for bankruptcy is a big decision, and the best plan for you depends on the details of your situation. Because bankruptcy is a tricky area of the law, it is best to find a bankruptcy lawyer for advice on the pros and cons and what the process will look like for you and your company.
The fifth option is to bring in an experienced merchant cash advance attorney. Merchant cash advances deliver quick cash, but things can get pretty ugly in the Merchant Cash Advance industry. MCA lenders can be pretty rough in the collection process. Creditors have a bad reputation for harassing owners and freezing bank accounts without notice. Business owners often don’t understand their rights, or how to fight back. It is a mistake to just accept an MCA creditor’s demands. Owners with a business that can’t pay its merchant cash advance can benefit from working with a lawyer who is experienced with MCAs. Having legal counsel get involved as early as possible can make the difference. An MCA attorney should not just give you the legal basics, they can look at your situation, put together a debt relief plan, negotiate with your lender, work out a settlement, protect your rights while they do it, and represent you if disputes arise.
Stop the Bleeding
The important thing is not to wait. The sooner you act once you see trouble coming, the better. Delaying can make it much harder to get out of the situation. You need to aggressively and immediately stop the bleeding.
