Your MCA payments are higher than your revenue. Now you can’t pay your vendors, and it’s starting to take a real toll on your morale. The cost of that quick fix is now eating away at your already stressed cash flow and making things much worse for you. The short answer to what happens next is that another advance will not get you out, but a negotiated plan might.
It usually starts with one question: what do you do when you have a bill (expected or unexpected) you can’t afford to pay? You go online, and bingo, a new MCA is there to front you some cash. Remember, an MCA is short-term financing meant to pay for a short-term need. It is not intended to be working capital. Things go from bad to worse because, just like a credit card, you begin to use the MCA to keep cash flow and business operations going. New debts come due, so you need to raise more money.
A Fast Track to Insolvency
That is stacking. Stacking is when a merchant over-extends themselves and layers multiple MCAs on top of each other. This is a fast track to insolvency. One debt negotiator described the experience of going through this process as “falling down a rabbit hole.” He has had clients with as many as 16 MCAs at once, totaling $8-9 million in debt. Some MCA companies openly advertise “2nd, 3rd and 4th” funding. Others are like a “club”, and pass the merchant around among themselves to get a commission on refinancing from one MCA to the next. If an MCA company tells you that you can get a second, third or fourth position advance, stay away.
But everything that can go wrong will go wrong. The obvious first problem is that the business owner will be paying all these fees, and their cash flow will be impaired. Calculated as an APR, many MCA agreements are over 100%. Some disclosures show figures even as high as 922%. Stack a few of those on top of each other and it is not hard to see how the daily debits end up bigger than the deposits.
A Reduced Payment Plan
Here is what most owners in your position don’t know. MCA companies do not actually expect to get the 100% promised in the contract. They want to get paid, of course, but prefer that the merchants come to them before defaulting, asking for relief and a reduced payment plan. The response is usually a reduced payment plan over 30-day cycles, because the funders are backed by investors with deep pockets, and so their investors demand monthly reporting. Timing matters. Speak to your funders early, before default. Most of them will accommodate you with a reduced plan. Some of them will not.
The difference between good and bad funders is the attitude about working things out, not the contract language. Good funders adjust payment amounts in the event of a temporary setback. Predatory funders refuse to bend and pile on more legal fees, insisting on the full 100% plus extra charges. Read your contract, too. One speaker offered that the contract’s reconciliation clause might be used to recover overpayments. But another cautioned that using that clause might be a mistake if it exposed underpayments as well. Partial payments have their place. Sometimes you just have to pay part of the MCA’s claim to get access to your working capital.
If you have a senior lender, you need to stay in constant contact with them. Lenders often find the MCA debt anyway, through bank statements full of recurring debits, UCC lien searches and sudden drops in deposits. A lender that knows can help. One negotiator on an industry panel described a client with a $20M factoring facility who was found to have $6.5M in MCA debt. With the factor backing him, the negotiator talked to every MCA provider for a year and got everyone to agree to a settlement at 25 cents on the dollar. A year later the company was financially healthier than the year before. “That’s a rare circumstance,” the negotiator said. But it shows what is possible.
The Legal Ground Is Shifting
The legal ground is shifting as well, and there’s been a growing trend towards courts reclassifying MCAs as loans if it appears from the facts that they are effectively loans. This means the usury laws of 26 states may apply, and the contract may be unenforceable. Some of the bigger MCA companies are keeping up with the times. Instead of a contract for the purchase of future receivables, they contract for a loan in a loan agreement governed by the law of Utah (which has no usury law) with an affiliated bank and at a high rate of interest. But the MCA company is the one making the decisions and doing the negotiating. A few states have gone further, among them Texas, which has effectively outlawed MCAs by banning ACH withdrawals unless the MCA has a first lien deposit account, which banks are reluctant to give them. North Dakota amended its usury laws to potentially cover MCAs. What applies to you depends on your contract and your state.
So start with the math: know what you are actually paying and what you are signing up for. You should not be signing any other MCA deals. You should go to your lender right now or someone higher up the food chain. Think collateral. Think creatively about financing. Do this, even if it means you have to wait a week for the money. It may well save you the consequences of your first deal. And if the payments have already passed what the business brings in, that is the moment to open the conversation with your funders, not after the first missed debit.
