A merchant cash advance can put a lot of capital in your hands in a short time, which is why so many small businesses use one to get through a hard stretch. But the reckoning comes when you have to repay it, in full and in a short period of time. Depending on your income stream, that can be extremely challenging. The daily payments started to add up and soon your cash flow was restricted. Maybe you found yourself struggling to manage the payments on top of your normal expenses. Maybe it didn’t happen that way, but ultimately you’re struggling with payments you can’t afford. Maybe you think you have to put a cap to your financial issues, and filing for bankruptcy might just be the way to handle it.
This is what’s often called the merchant cash advance trap. Is filing for bankruptcy the only solution for dealing with merchant cash advances? No, but it should be considered as a potential solution if you find yourself in a financial situation where you can’t meet the obligations of a merchant cash advance agreement. Much of the time, you can work your way out of it without filing bankruptcy. The truth is that before you make any decisions about what to do with your debts, there are some important options to work through first.
Ask for a Lower Payment
The first is to ask for a lower payment. Those daily payments are usually very high and it can be hard for a small business to pay the daily payment and keep the business afloat. Regardless of which way things go, there is money being taken out of your account every single day. Many business owners do not realize that the contract they signed has a provision that lets them negotiate a lower payment. This process is known as a reconciliation. Reconciliation is the term for when the funder adjusts your repayment schedule when your business hits a rough patch. It’s not wrong. It’s not a breach of contract. It’s your right. So if you feel yourself starting to fall behind, always seek reconciliation before you take more drastic measures.
If the funder refuses to lower the payment to a reasonable amount, flat out denies your right to a reconciliation, or you’re worried about even asking, talk to an experienced merchant cash advance attorney. A good one can argue on your behalf and put some pressure on the funder, and might be able to negotiate a more reasonable payment for you. Or the lawyer may recommend other legal options.
The second option is to replace the advance with a term loan. Merchant cash advances are high-cost financing options. Some businesses pay back two or three times what they receive. That is not sustainable. It can also cripple your cash flow. The interest rate is generally lower with a term loan than an MCA. And you can get a loan that can be paid back over time, or amortized. That way, the repayment terms are generally much easier to manage. Unlike a Merchant Cash Advance, payments on a term loan are made monthly, not daily. Repayment is over a longer term. The catch is that term lenders look at a whole lot more of your business than the sales of your goods and services. You’ll likely need a great credit score and proof of decent profits over the past few years. But for many small business owners, their credit might not be as great as they’d like it to be, and maybe they haven’t been profitable for years. That means their options will be limited. There are many different types of term loans. One type of term loan may be better for you than another.
The third option is an asset-backed loan, for owners who don’t have the credit or the time to wait for a term loan. The name already explains quite a bit. With an asset-backed loan, you’re borrowing money against an asset the business owns, such as a piece of equipment or property, which serves as collateral. Since the lender has the right to collect that asset if you default, the loan is less risky for them. Asset-backed loans generally have lower interest rates and better terms than merchant cash advances. One won’t get you out of debt, but a longer repayment term could give you relief from those daily payments. The catch is the asset itself. If you default, you might very well lose it. If your business doesn’t come up with the necessary money, the lender is going to get it, through the collateral you used to secure the loan.
When Does Bankruptcy Make Sense
So when does bankruptcy make sense? Bankruptcy is generally a last resort. But a substantial number of business owners have had no other choice. If nothing else works, bankruptcy may be the best choice. If you do file, there are several types of filings, all very different, and they have very different effects on a small business. They range from liquidation to salvation. It’s important to understand, however, that filing for bankruptcy doesn’t mean your business is automatically closed. Depending on your situation, you might be able to wipe out much of the debt, protect assets from seizure, and keep control of the business.
Being faced with the reality of filing for bankruptcy can be unsettling, which can create confusion and add to the emotions already running high. That’s why it’s important to know what you’re getting into when you decide to file. Get a competent business bankruptcy lawyer to walk you through the various options. You need to understand the different options, and to be honest with yourself about what you can afford.
Don’t Face an Aggressive Funder on Your Own
Whatever path you choose, don’t face an aggressive funder on your own. Merchant cash advances provide quick cash, but many MCA creditors use practices that can harm small businesses, from harassing owners to collect on the debt to freezing accounts without notice. When it freezes, everything freezes. No more money in, no more money out. It’s terrifying because you lose control of your business in the worst way possible. Get help as soon as possible. In such situations, a business lawyer can be an invaluable asset. An experienced MCA attorney can sit down with you, look over your situation, and give you a road map to get rid of your debt. If a lawsuit over an MCA settlement comes your way, an attorney can represent you. He or she will protect your legal rights while negotiating with lenders. An attorney can help you make the right choice for you and your needs. Do your due diligence on the lawyer that you select.
If you’re behind on payments, you might be thinking it’s too late to do anything. You’re not alone! So, should you file bankruptcy over a merchant cash advance? It is one option, and it could be your best option if everything else fails. However, it shouldn’t be your first. First, try to negotiate a lower payment. If that doesn’t work, explore taking out a term loan or an asset-backed loan. It’s worth getting advice from someone who is experienced, so do that early, and don’t wait.
