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Merchant Cash Advance Debt Relief – A Helpful Guide

Getting a merchant cash advance can seem like a great way for small businesses to quickly access capital. Unlike traditional bank loans, merchant cash advances don’t require a stellar credit score or providing extensive financial records. The merchant cash advance company simply takes a percentage of your future credit card and debit card sales until the advance is paid back, plus a fee. Easy money, right?

But what happens when your business hits a rough patch and can’t keep up with the daily payments? The initially attractive terms can quickly snowball into a debt trap, with fees piling up and your credit score taking a nosedive. Before you know it, the merchant cash advance company has drained your bank account and you’re facing bankruptcy.

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If this sounds familiar, you’re not alone. Plenty of well-meaning business owners have found themselves in over their heads with merchant cash advances. But there are solutions, from debt relief programs to legal defenses. This guide will walk through your options so you can get your finances back on track.

How Merchant Cash Advances Work

First, let’s quickly review how merchant cash advances work. Rather than issuing you a lump sum that you repay with interest like a traditional loan, the merchant cash advance company purchases a percentage of your future credit card and debit card sales. Typically they’ll purchase between 8-15% of your daily sales until the advance amount plus a fee is repaid. This fee can range from 1.1 to 2 times the advance amount.

So if you get a $10,000 advance with a 1.5x repayment rate, the merchant cash advance company will collect 15% of your daily credit/debit sales until they’ve received $15,000. There’s no set repayment schedule – they simply take their cut each day via ACH withdrawals from your bank account. This means if sales are low, repayment is slower but the fee keeps accumulating.

The ease and speed of getting funds makes merchant cash advances enticing. You don’t need good credit and can often get money in your account within a few days of applying. But when cash flow slows down, you get stuck paying back far more than you borrowed.

When to Consider Debt Relief

If making your daily payments has become a struggle, it’s time to look into debt relief options. Warning signs include:

  • Need to take out another merchant cash advance to cover payments on an existing one
  • Falling behind on payments to the point where the merchant cash advance company is threatening collections or legal action
  • Drastic measures like laying off staff or cutting other expenses just to make daily payments
  • Credit score plummeting due to missed payments
  • Merchant cash advance payments consuming over 10% of your sales

Don’t wait until your back is completely against the wall. The earlier you take action, the more options you’ll have.

Debt Relief Programs

If you’ve realized your merchant cash advance debt is unmanageable, the first step is contacting the company directly. Be honest about your situation and ask if they have any hardship programs or alternative repayment options. Reputable companies may be willing to work with you by doing things like:

  • Temporarily lowering your daily repayment percentage
  • Extending the repayment term so you have more time to pay back the advance
  • Agreeing to a fixed monthly repayment schedule rather than taking a percentage of daily sales
  • Waiving some of the fees or interest

This depends on the lender, but doesn’t hurt to ask. Any concessions they’ll make will be laid out in an amended merchant cash advance agreement.

If negotiating doesn’t work, the next option is a debt management plan through a nonprofit credit counseling agency. They’ll work with the merchant cash advance company to get a repayment plan in place based on what you can afford. This can include reducing interest rates and waiving fees.

The downsides are the monthly administration fee charged by the credit counseling agency, and the potential impact to your credit. Enrolling in a debt management plan may be reported to the credit bureaus. But it’s certainly better than defaulting!

Debt Settlement for Merchant Cash Advances

With debt settlement, you work with a company who negotiates directly with your creditors to settle debts for less than you owe. This can be an option for unsecured merchant cash advances if the original lender sold the debt to a collection agency.

The process works like this:

  1. You stop making payments to the merchant cash advance collections company and instead save up that money in a dedicated account.
  2. After several months when a sizable amount has accumulated, the debt settlement company approaches the collector and makes a lowball offer to settle the debt. Say 25% of what’s owed.
  3. The collector accepts the offer and settles for that amount, then reports the reduced debt to the credit bureaus.

This can resolve merchant cash advance debts for much less than you owe. Just be prepared for collectors to pursue legal action in hopes of getting full repayment. Having a lawyer review any settlement agreements is advised.

Bankruptcy for Merchant Cash Advance Relief

As a last resort, personal or business bankruptcy may be an option for finding relief from overwhelming merchant cash advance debt. But first, let’s clarify a common misconception…

Can Merchant Cash Advances Be Discharged in Bankruptcy?

Many people mistakenly believe that since merchant cash advances aren’t technically “loans”, the debts can simply be discharged through bankruptcy. Unfortunately it’s not that straightforward.

While merchant cash advances aren’t considered loans due to the alternate repayment structure, bankruptcy courts still view them as credit transactions. This means the debt is not automatically discharged.

However, the merchant cash advance company must file an adversary proceeding and prove the debt is valid and should not be discharged. So it comes down to whether their agreement meets the standards for a non-dischargeable credit transaction. Things like exorbitant fees or interest rates over 60% could potentially invalidate the debt.

Every situation is different. Working with a bankruptcy lawyer experienced in these type of cases is important. They can review your merchant cash advance agreements and advise if the debts may be dischargeable.

Chapter 7 vs Chapter 13 Bankruptcy

If bankruptcy looks to be a viable path forward, the next decision is whether to file Chapter 7 or Chapter 13. Here’s an overview of how they work:

Chapter 7 Bankruptcy

  • Liquidation bankruptcy that discharges many unsecured debts like credit cards, personal loans, and medical bills
  • Allows exempting certain assets like home, car, retirement funds
  • Dischargeable debts erased, non-dischargeable debts like student loans remain
  • Over within 3-6 months

Chapter 13 Bankruptcy

  • Debt restructuring plan with repayment schedule over 3-5 years
  • Monthly payments made to trustee who distributes to creditors
  • Upon completion, many remaining unsecured debts discharged
  • Allows catching up on mortgage, car loans, other secured debts
  • Typically only required to repay portion of unsecured debts

As you can see, the main tradeoff is Chapter 7 provides immediate debt relief but requires liquidating non-exempt assets. Chapter 13 allows keeping assets with a repayment plan over time.

Chapter 7 may be the better option if your primary goal is discharging credit card, medical, or other unsecured merchant cash advance debts. Chapter 13 allows more time to negotiate the potential discharge of merchant cash advance debts while keeping assets.

Talk through the pros and cons with your bankruptcy lawyer to decide which path works best for your situation.

Using the Uniform Commercial Code for Defenses

Beyond bankruptcy, there are other legal defenses business owners can assert to fight back against predatory merchant cash advance companies and debt collectors. A powerful tool is the Uniform Commercial Code (UCC), which governs commercial transactions across the United States.

Two provisions of the UCC provide potential defenses against unfair merchant cash advance agreements:


If the terms of the agreement are so unfair as to be considered unconscionable, courts can refuse to enforce them. Elements like absurdly high fees and interest rates, or misleading terms could potentially render a merchant cash advance agreement invalid.

Unjust Enrichment

If the plaintiff has profited unfairly from the agreement, courts can award damages to the defendant for unjust enrichment. This often comes into play if excessive fees and rates resulted in the lender receiving significantly more than the advance amount.

Don’t let predatory lenders take advantage of your financial hardship. Under the UCC, courts can limit their recovery to just the amount advanced or the remaining unpaid balance. But be sure to work with an attorney experienced in leveraging these defenses.

Avoiding Merchant Cash Advance Scams

With any type of financing, it’s important to avoid merchant cash advance scams and shady providers. Here are some red flags to watch out for:

  • Unsolicited offers demanding immediate payment
  • Requests for upfront fees before receiving the advance
  • Requirements to purchase other products or services
  • Claims that the merchant cash advance isn’t a loan so it’s risk-free
  • No clear explanation of repayment terms and fees

Do your due diligence before signing anything. Get proposals from multiple merchant cash advance companies so you can compare terms. Read the agreement carefully and have a lawyer review it if possible. Only work with established providers with a track record of ethical practices.

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