If you stacked merchant cash advances and then couldn’t pay the MCAs, can you be accused of fraud? It is a question we hear at Delancey Street from owners who have fallen behind. Business owners are understandably upset when they hear the word “fraud” in reference to their case. It sounds bad and sounds like theft. The other one we hear is “Is this even legal?” The short answer is that stacking is technically not illegal. But next we hear the inevitable follow-up: “What are they going to do about it?” Let’s look at how stacking works, and potential fraud in stacking.
Where Does Fraud Come In
”Stacking” occurs when a merchant takes out a second or third MCA before paying off an outstanding MCA. The industry also calls it taking “multiple positions.” A stacked business makes repayments on multiple advances at the same time, out of its daily processing. Since MCA rates are typically higher than other forms of funding, it can be challenging to maintain cash flow when making a number of advance payments. If you took a second loan to pay off the first one completely, you would be refinancing your loans, not stacking. Refinancing pays off the current loan in full, and then starts over. The new lender gets to approve the extra debt. There’s a new advance and nothing to stack.
So where does fraud come in? It comes in when owners make a misrepresentation to the funder. If the business owner tells the funder they don’t have any other loans, but in fact they do have other loans outstanding, they could be accused of fraud. Identity theft is the other example. In other words, stacking can involve one party engaging in fraudulent activity even though stacking alone is not illegal. It’s when merchant cash advances are piling up and there is not sufficient cash to make payments that the fraud question comes up.
A Vicious Cycle of Stacking
Some owners stack because they’re desperate to pay their bills. Some take a second advance to fund growth or to cover operating costs, including the cost of the first advance. Others stack an MCA on top of a bank loan because they couldn’t get the full amount from the bank. Stacking creates more cash up front, but at a higher price. Not everyone has the luxury of waiting, however. And some brokers make it easy. Your first funder files a UCC lien, which is public record, and a less reputable broker can go in and find that advance of yours easily, and go hounding your business to take an advance from them.
The trouble is that your first funder sized its advance to what it thought you could reasonably pay back. A second advance piled on top of the first increases your total debt load, and you might find it’s harder to service both advances. So now you have to pay the second advance on top of the first, but both of them are working off your cash flow. That makes it much harder to pay back one or the other. If you never had a plan for repaying the first one, you may start spending the cash on the new advance on the old advance instead of using it to operate the business. Your rates and fees may double, or more, and the payments cut deeper into your sales on slow days. All of this can start to snowball, creating a vicious cycle of stacking that quickly spirals out of control. Plenty of owners end up stuck in a debt cycle, one that is much easier to get into than get out of.
So what happens when you can’t make your payments? If you get to the “cashflow disaster” scenario, things can go bad very fast. And if you also had a bank loan or an SBA loan, read it closely. Some of those agreements have provisions against taking other financing such as merchant cash advances, so if you took an advance, it could violate your contract, and that lender may demand full, immediate repayment. If you don’t have that loan document on hand, call your lender and request a copy.
The Best Step an Owner Can Take
If you haven’t stacked yet, the best step an owner can take is not to stack in the first place. If you are getting to the point of stacking, check with your existing funder first. They might offer to refinance the first advance, as opposed to stacking on top of it. Many funders will consider it if you’ve been paying on time, especially once more than half the advance is repaid. Not all funders will agree to a refinance, but this is the best place to start. Watch for “double dipping,” where funders refinance in a way that compounds your fees and money owed. Before you refinance your MCA, read the contract carefully. Ask for a detailed breakdown of costs and whether fees on the old advance are waived. Watch out for hidden fees. Get everything in writing. Be careful how much debt you take on at one time, and whether your business can afford the costs of repayment. No advance is a freebie.
If you have already stacked and defaulted, and a funder is calling it fraud, our advice for you is to work to understand your situation fully before you take drastic action. Look at your funding documents carefully to determine what you signed and what each particular funder considers default. Ask your funder what the current status of your account is, what the balance on your MCA is and what the amount of the future payments are. Then think honestly about what you told each funder. Do they have evidence of your having misled them? How did they come to that conclusion? If they are accusing you of fraud, is there a clear misrepresentation? Don’t rely on the advice of debt collectors. They’re out to collect debt, so don’t take their word as the last one. If you believe you could face a real fraud claim, speak to a lawyer right away. Get advice before you say anything. At Delancey Street we negotiate with funders to settle stacked MCA balances for less than the full amount owed. When litigation or bankruptcy is the right call, we refer owners to a vetted independent attorney. If you have questions about stacking or fraud in business financing, call us at Delancey Street. We are not a law firm but we have spoken with many small business owners who are finding out the hard way what happens when stacked advances go bad. The first consultation is free and confidential.
