How Do I Get Out of Paying a Merchant Cash Advance?

Merchant cash advances have become an increasingly popular form of alternative financing for small businesses in recent years. While these advances can provide quick access to capital, they also come with very high costs and aggressive repayment terms that can put businesses in a cycle of debt. So what can you do if you’ve taken out a merchant cash advance but are now struggling to make the payments?

Understand How Merchant Cash Advances Work

First, it’s important to understand what a merchant cash advance is and how it works. A merchant cash advance provides an upfront lump sum payment to a business in exchange for a percentage of future credit card sales over a set period of time. This is different from a traditional small business loan in several key ways:

• There is no set repayment schedule – the business repays the advance as a percentage of daily credit card sales
• There is no fixed interest rate – the total amount repaid is usually 1.2 to 2 times the original advance
• Approval is based on credit card processing volume, not business revenue or the owner’s personal credit
• The payments are taken automatically as a percentage of each credit card transaction

This structure allows businesses with poorer credit to access capital quickly, but it also means the total repayment cost is very high. Rates often equate to 50-100% APR or more.

Review the Merchant Cash Advance Agreement

The next step is to thoroughly review your agreement with the merchant cash advance provider. This contract will spell out:

• The amount of the original advance
• The fixed percentage or “factor rate” taken from each transaction
• The total repayment amount you’ll owe
• The duration over which payments will be taken
• Any fees associated with late payments or early repayment

Understanding all these terms is essential to finding potential ways out. Look closely for sections on early repayment, penalties, and any clauses about changes in your credit card processing.

Attempt Early Repayment

One option to get out of a merchant cash advance is to pay it back early. Some providers will allow this without any prepayment penalty. You’ll need to come up with the lump sum remaining on the advance, but it allows you to move on quickly. Other providers do charge fees for early payoff, so check your contract.

Early repayment can be very difficult, as coming up with a large lump sum is often the reason a business took the advance in the first place. But if possible, it can stop the daily payments from eating into your revenues.

Renegotiate the Agreement

If early repayment isn’t feasible, another possibility is renegotiating the terms directly with the provider. Be transparent about your financial situation and struggles making daily payments. Ask if they can reduce the percentage taken from each transaction to give your business some breathing room.

Most providers want to get repaid, so they may be open to tweaking terms if it means avoiding default. However, their priority is still getting their money back, usually within 6-12 months, so don’t expect drastic changes.

Switch Credit Card Processors

An aggressive but potentially effective strategy is to switch credit card processing companies altogether. Since merchant cash advances are repaid as a percentage of credit card sales, the provider needs access to process those transactions.

By moving your processing to an entirely new provider, you may be able to temporarily stop the percentage deductions. This can buy you time but may also incur penalties for breach of contract.

File for Bankruptcy

As a last resort, filing for business bankruptcy can discharge outstanding debts, including merchant cash advances. This has severe impacts on your business credit and operations, so only consider it if truly necessary.

Consult an attorney about the type of bankruptcy filing that could discharge your advance debt. Chapter 7 liquidation or Chapter 11 reorganization may be options. The provider could potentially dispute the filing.

Negotiate a Settlement

Before resorting to bankruptcy, you may be able to negotiate a settlement for a lump sum that is less than the remaining balance. The provider has incentive to settle for a lower amount rather than risk nonpayment through bankruptcy.

Have a clear idea of what you can afford and make your case for a settlement. Get any agreement for a reduced payoff in writing before sending payment.

Change Bank Accounts

If your merchant cash advance payments are automatically debited from your business bank account, you may be able to stop them by closing that account. Open a new bank account for your business and transfer activities there.

This can temporarily halt payments until the provider gets your new account information. But it will likely violate your agreement, leading to fees or other consequences.

Consider Legal Defenses

There are some legal arguments that could potentially invalidate a merchant cash advance agreement or stop collections activity:

• Usury laws – Interest rates above state maximums may be unenforceable
• Unconscionability – Terms so unfair no reasonable person would agree to them
• Fraud – Providers misrepresenting terms could invalidate the contract
• Deceptive trade practices – Violations of consumer protection laws

Consult an attorney to see if any defenses apply to your situation. These arguments can be difficult to prove but may provide leverage in negotiations.

Accept the Consequences

If you have exhausted all options, the final choice may be to simply accept the consequences of nonpayment. The provider will likely send the unpaid balance to collections, damaging your business credit standing.

They may also file a lawsuit to recoup the debt. You can try negotiating with debt collectors once it reaches this stage, but they are unlikely to settle for less than the full amount.

Defaulting on a merchant cash advance should only be a last option when continuing payments is no longer viable. Be prepared for the provider to aggressively pursue the debt.

Key Takeaways

Getting out of a merchant cash advance is very difficult once you’ve signed the agreement. Work to understand the terms and seek modifications where possible. Consider repayment strategies, account changes, legal defenses, and negotiations to improve your situation.

Avoiding default has less impact on your business. But if the payments are truly unaffordable, you may need to accept the consequences of nonpayment through collections and lawsuits.

Thoroughly evaluate financing options before accepting a merchant cash advance. But if you are already struggling to repay one, these strategies could provide some relief.