How To Get Out Of A Merchant Cash Advance

How To Get Out Of A Merchant Cash Advance

Getting out of a merchant cash advance can be challenging, but there are some potential options to explore. A merchant cash advance is a form of alternative business financing where a company receives an upfront sum of money in exchange for a percentage of future credit card sales. While merchant cash advances can provide quick access to capital, the high fees and daily repayments can sometimes create cash flow issues for businesses. If you’ve entered into a merchant cash advance and are looking for a way out, here are some strategies to consider:

Understand Your Agreement

The first step is to thoroughly review your merchant cash advance agreement. These contracts can be complex, so make sure you understand all the terms and conditions, including:

• The amount advanced and any fees charged
• The fixed daily repayment amount
• The repayment period and term length
• Any penalties for early repayment
• The personal guarantee – are you personally liable?
• Which state’s laws govern the agreement

Knowing the details will allow you to better assess your options. Also check if the agreement contains an arbitration clause, as this may limit your ability to sue.

Attempt Refinancing

One potential strategy is to refinance the merchant cash advance with another provider. This would involve taking out a new advance to pay off the existing one. The benefits are getting better terms, lower daily payments, and consolidating multiple advances into one. The downsides are it still leaves you paying off an expensive advance, and refinancing too frequently can hurt your business’s credibility.When researching refinancing offers, look for providers willing to buy out your entire balance so there are no penalties. Also look for lower rates and fees. Some questions to ask:

• What are the one-time fees for the new advance?
• What will the daily repayment rate and amount be?
• Does the new term length give you more breathing room?
• Are they deducting payments via ACH instead of taking a percentage?

Refinancing makes the most sense if you can substantially improve the terms and affordability of the advance.

Negotiate With the Funder

Another option is to negotiate directly with your merchant cash advance provider. There is no guarantee they will agree, but it doesn’t hurt to ask. Some potential negotiation points include:

• Lower daily rate – If cash flow is tight, ask if they can temporarily reduce the daily deduction amount. This reduces pressure on your business.
• Longer term – See if they will extend the repayment term so you have more time to pay back the advance. This lowers the daily burden.
• Payment plan – Propose a payment plan that works for your seasonal business cycles, rather than daily payments.
• Settlement – Offer a lump sum payment to settle the advance early at a discount. Use this if you have access to capital.

Any concessions you can get from the funder will help ease the repayment burden on your business. Be persistent and explain how their flexibility helps preserve the relationship.

File Complaints

If the merchant cash advance company engages in any illegal or unethical business practices, consider filing official complaints with regulators:

• State attorney general – File a complaint about deceptive or abusive lending practices. This puts the funder on notice.
• CFPB – The Consumer Financial Protection Bureau takes complaints on business lending abuses. Their investigations can lead to penalties against funders.
• FTC – The Federal Trade Commission enforces laws around unfair lending practices. Their complaints can trigger investigations.
• BBB – The Better Business Bureau provides dispute resolution services and can help resolve complaints.

Documenting misconduct, especially patterns of it across multiple borrowers, can potentially lead to sanctions against unscrupulous funders.

Challenge the Advance’s Legality

Some merchant cash advances rely on questionable legal practices that courts have started to crack down on. Depending on your agreement, there may be ways to legally challenge the advance’s validity:

• Usury violations – If the fees and interest exceed state usury caps for loans, the advance may be void. Proving usury requires calculating the true APR.
• No underwriting – Lack of underwriting is being seen by courts as a sign of an illegal loan masquerading as a purchase.
• Unlicensed lending – Doing business in states where the company lacks a lending license can jeopardize the agreement.
• Deceptive practices – Things like misrepresenting terms, not disclosing fees, or forcing personal guarantees could invalidate the advance.
• Unconscionability – If the terms are absurdly one-sided or abusive, courts may deem the contract unenforceable.

Challenging an unlawful merchant cash advance requires extensive legal research and litigation. Consult qualified legal counsel to assess if this approach is viable.

Claim Bankruptcy Protection

As a last resort, bankruptcy may provide relief from overwhelming merchant cash advance debt:

• Chapter 7 – Liquidates your business assets to pay creditors. Remaining debts like advances are discharged.
• Chapter 11 – Allows restructuring debts through a court-approved repayment plan over 3-5 years.
• Chapter 13 – Similar to Chapter 11 but for smaller businesses with less debt.

The right bankruptcy chapter can eliminate the legal obligation to keep paying the merchant cash advance. However, the damage to your business’s credit and relationships with vendors may be irreparable.Meet with an experienced bankruptcy attorney to discuss how bankruptcy could impact your business’s financial future. Weigh the pros and cons carefully.

Avoid Desperate Measures

When struggling with repaying a merchant cash advance, avoid any rash decisions that make the situation worse:

• Closing your business – This triggers the full balance becoming due immediately.
• Stopping payments – Can incur penalties and leave you being sued or sent to collections.
• Taking another advance – Just digs you deeper into debt if you are already struggling.

Stay engaged with the funder, seek help from legal and financial experts, and explore every legitimate option before making things harder on yourself. Patience and diligence are key.