You were excited because you got the cash you needed. Now, you are paying for that excitement. You feel fear. You feel overwhelmed. It is a normal human reaction. The MCA payments take too big a bite out of your daily receipts, and you can’t cover your bills with the leftover money. Or maybe you were never able to cover your bills, and you’ve gotten caught in a cycle of compounding debt from new advances to make up for old ones. Now what? But you are not the first to face this challenge. Let’s breathe and fix this.
An MCA Is Not a Loan
An MCA is not a loan. It’s an advance on future card sales. Your MCA provider takes a holdback percentage (10-20% is common) of all card sales until the advance is paid in full. Payment deductions start the day after funding, with no grace period. If your holdback is 15 percent, on a day with $5,000 in card sales your MCA provider gets $750, and on a day with $8,000 they get $1,200. Some MCAs base payments on sales, so if you have a slow day, your payment shrinks. Others are a fixed amount, so when sales go down, the payment amount doesn’t shrink.
If you’re getting 15 percent of $5,000 per day for MCA repayments, that’s $750 of each day, multiplied by 7. Now you’re down over $5,000 for that week. Meanwhile, other normal expenses like your payroll have to come from what’s left over. It’s not hard to see how MCA payments can get out of control.
Then there is the price, which is set by a factor rate. Take a $10,000 advance at 1.5: $10,000 x 1.5 = $15,000. You will pay $15,000 to borrow $10,000. That’s a $5,000 cost. A low factor rate is comparable to 35% APR, and a high factor rate can be 350% APR or more. There may be fees in addition to the factor rate. Some MCAs penalize early payoffs. And MCAs typically aren’t reported to business credit reporting bureaus, so all those payments do nothing to build your business credit.
Oftentimes, the merchant has a serious cash flow problem, and the money was used to cover expenses that couldn’t be paid any other way, like overdue payroll. Instead of using the advance to fuel growth, the cash was used to keep the business afloat. When you’ve already spent the advance on things like payroll, it’s hard to have enough cash to meet the MCA payments.
Manage Your MCA Payments
Next, pull out your contract. Question everything. You may be shocked at what you find. Depending on the deal, the MCA sometimes collects on weekends. Some every day, some once a week. It varies. But the only way to find out is to look at the deal you signed or call the MCA. To manage your MCA payments, you need accurate information about your sales and income. Then, create a budget. From there, evaluate the MCA cost and determine how much room you have left for other expenses. Is the math showing that your payments are unsustainable? You may need to force yourself to do this, but the closer you get to reality, the more options you will see.
A common question we hear is whether or not you should take on another advance just to cover the payment. Unfortunately, this is not a good idea and it is something you really should not do. Once you start going this route, you get wrapped up in a web of costs and extra fees that will quickly become very expensive. It’s called stacking, and it’s expensive. I understand the psychology behind it. If you’re doing this, and relying on future sales to make it work, you’re walking a dangerous path. Do not fall into the habit of relying on MCAs.
Refinancing with a Traditional Small Business Loan
If you want to escape the grips of that nightmare MCA contract, we can’t think of a better solution than refinancing with a traditional small business loan. Rates are usually far lower. You need to have a personal credit score of above 650 for an SBA loan, and many banks will require at least a 680. Unfortunately, if your credit was bad when you got the MCA, it might still be too bad to qualify.
But if your credit is lacking and you can’t qualify for a business term loan, you can get an asset-based loan instead. The idea here is that you borrow money against receivables, inventory, or real estate. Asset-based loans are more expensive than a conventional bank loan, but they’re usually less expensive than an MCA. And they’re easier to qualify for. This can be a revolving line of credit or an amortized loan.
You could also explore factoring your invoices or using a business credit card with a 0% introductory APR. With factoring, you get to sell your invoices at a discount. If your customers buy on invoice, this could be an option. Accounts receivable financing is a little different. This is a loan. It is usually reported to business credit bureaus, which means paying it on time can help your business credit, something an MCA typically won’t do. A business cash advance is another possibility. This is a fixed payment, and it may cost a bit less than an MCA.
What you should not do is simply stop paying. Many MCA contracts include a performance guarantee, meaning if you default, your business credit can suffer, you could face collections, a lawsuit, and large fees. Then you will be in a worse situation than you were in when you started.
If you reach a point in which you are having difficulty making your MCA payments, don’t be discouraged. It doesn’t mean your business is finished. Before you make any decisions, talk to a financial advisor or accountant. A professional accountant or bookkeeper can help you analyze, optimize, and restructure your cash flow or the cash flow of your business. This post is intended to help you manage your MCA payments, not to scare you. If you can’t manage your cash flow with that MCA or any business loan for that matter, something needs to change.
