Can You Refinance A Merchant Cash Advance?

Merchant cash advances provide quick financing by purchasing a portion of future credit card sales. But the extremely high costs often motivate merchants to refinance and find lower cost alternatives after the fact. However, refinancing an MCA can be challenging due to their structure as an advance rather than a loan.

MCA companies argue they are not making loans but purchasing future receivables, so normal lending regulations do not apply. This also complicates debt consolidation or refinancing. While options exist, each has limitations merchants should understand before attempting to refinance an MCA.

The Challenges of Refinancing an MCA

Several aspects inherent to merchant cash advances create obstacles to refinancing:

• No fixed loan balance or payment schedule
• Repaid as percentage of daily credit card sales
• MCA company owns rights to future receivables
• No clear payoff amount
• Difficult to prove income with cash basis accounting

For example, since there is no set principal balance or maturity date, providers have no incentive to accept a lump payoff. The original MCA company also argues they own the rights to future sales, complicating another lender stepping in.

Refinancing Options and Challenges

Taking Out Another MCA

Some merchants obtain a new MCA to pay off the previous one. But this rarely provides real savings since new MCAs carry similar triple-digit interest rates. It also perpetuates the same aggressive repayment structures that merchants want to escape. Stacking multiple MCAs also increases risk of being unable to meet payments.

Using a Bank or SBA Loan

Conventional loans have lower rates and fixed payments, but qualifying can be difficult:

• Lenders wary of MCA repayment obligations
• Underwriting based on credit scores or revenue history
• Existing MCA reduces available cash flow
• First lien rights complicate collateralization

Banks also prefer term loans amortized over set periods rather than revolving credit lines matching MCA repayment structures.

Factoring or Purchase Order Financing

These financing options also leverage future business revenues. But they provide more control than MCAs:

• Can cap repayment amounts
• Lower rates than MCAs
• Still no fixed payoff amount
• First lien challenges remain

So while more affordable, factoring and PO financing may not fully extricate merchants from MCA obligations.

Debt Consolidation Loans

Personal or business debt consolidation combines multiple debts into one loan. This can help manage payments but has some downsides:

• Rates often higher than mortgages or bank loans
• Collateral required
• Balloon payments
• Variable income still an issue

The MCA provider must also agree to receive a lump payoff and release future receivables. Overall, debt consolidation offers only marginal improvements and does not provide a full exit.

Key Strategies for Refinancing an MCA

While challenging, some merchants do successfully pay off MCAs through refinancing. Strategies that improve the odds include:

• Obtaining fixed-term financing whenever possible
• Working with lenders familiar with MCAs
• Having a strong credit profile and revenue history
• Negotiating lump payoff with MCA provider
• Freezing debt prior to refinancing

Consulting attorneys or financial advisors can also help navigate the complexities of replacing an MCA with other financing options.

Alternatives to Refinancing MCAs

Given the challenges, other options may better serve merchants wanting to exit an MCA:

• Renegotiate settlement with MCA provider
• Declare bankruptcy to discharge debts
• Sell or close the business
• Improve operations to pay off MCA faster

The key is thoroughly understanding obligations and evaluating all alternatives before committing to a new financing strategy.

Avoiding the Need to Refinance MCAs

The best approach is avoiding the need to refinance an MCA altogether. Before accepting funds, merchants should:

• Review contracts carefully for repayment terms
• Understand there is no early repayment option
• Consider alternate, lower-cost financing first
• Consult a lawyer on contract obligations
• Assess their ability to manage repayments

With high costs and aggressive collections, MCAs rarely improve long-term financial outlooks for small businesses. Their structure creates an expectation that refinancing will provide an escape. But in reality, few good options exist once payments begin.

Can You Refinance A Merchant Cash Advance?

With high repayment costs through daily deductions, many small business owners seek relief from merchant cash advance debt. Refinancing an MCA to get better terms with lower rates seems attractive. But the unique structure of merchant cash advances makes refinancing extremely difficult in most cases.

How Merchant Cash Advances Work

To understand the refinancing challenges, it helps to first review how merchant cash advances (MCAs) differ from conventional small business loans. With an MCA, a funder provides a lump sum upfront in exchange for taking a fixed percentage of the business’s future credit card or debit card sales until repaid in full.

There is no set loan principal, interest rate, or payment schedule. The unpredictable nature of MCAs causes issues when attempting to refinance.

Issues Refinancing MCAs

When refinancing a loan, the new lender essentially buys out the old debt and issues a fresh loan under new terms. But critical details needed to refinance standard loans are lacking with MCAs, including:

• No fixed principal balance – the amount advanced can vary.
• No interest rate since daily deductions are used, not interest.
• No structured repayment schedule to assume.
• Repayment amounts fluctuate daily based on card receipts.

With so much uncertainty about balance and payments, few lenders feel comfortable refinancing MCAs.

Underwriting Difficulties

Refinancing lenders also struggle with underwriting MCAs. They apply limited financial credit standards upfront. MCA approvals focus more on short-term card sales volumes than business credit scores or financial ratios.

This leaves refinancers with little verified financial information to evaluate credit risk.

Repayment Risks

The flexible structure of MCAs provides no guarantee a business will generate sufficient card receipts to repay the balance within a predictable timeframe. There is always risk the business lacks the revenue to service the debt.

By contrast, loans have fixed regular payments and terms. Refinancers hesitate to assume MCA repayment uncertainties.

First Position Lien Obstacles

To secure their investment, MCA funders take a first position lien against the business’s future card sales and receivables. But these liens are on irregular income streams, not fixed hard assets.

This deters other lenders from taking subordinate positions on these intangible future revenue sources.

What Refinancing Options Exist?

Because of these hurdles, traditional lenders rarely refinance or consolidate existing merchant cash advances. But some possibilities include:

• Obtaining a new MCA at lower rates to pay off the first provider.
• Securing an installment loan or line of credit from an asset-based lender.
• Using a 401(k) or retirement plan loan if the business owner has sufficient personal funds.
• Putting business costs on a lower rate credit card.

Each option has pros and cons to weigh carefully before proceeding.

Tips For MCA Refinancing

If still attempting to refinance an MCA despite the difficulties, the following tips can help:

• Have 6-12 months of MCA payment history established.
• Maintain low processing volumes to ease takeover.
• Provide card receipt data proving consistent repayment ability.
• Accept a second position lien on receivables.
• Offer business or personal assets as additional collateral.

Improving your case and negotiating flexibility gives the best shot at success.

Downsides to Refinancing MCAs

Before refinancing an MCA, also carefully weigh potential pitfalls:

• Higher total costs over the loan’s duration.
• Inflexibility obtaining other financing.
• Exiting an MCA early can prompt penalties.
• More risk of default with longer repayment terms.

Work closely with professionals before making moves.

Key Considerations

Refinancing a merchant cash advance can reduce payments and save money over time if done successfully. But the distinctive variable nature of MCAs poses barriers and risks.

Owners should explore multiple debt relief options, not just refinancing. With expert guidance, an optimal solution can be found.