How To Get Out Of A Merchant Cash Advance[yoast-breadcrumb]
How To Get Out Of A Merchant Cash Advance
Getting trapped in a merchant cash advance can feel scary. The high repayment rates and daily deductions can make it seem impossible to get out of. But there are solutions if you find yourself regretting taking a merchant cash advance. Don’t panic – read on to learn how you can get out of a merchant cash advance.
What is a Merchant Cash Advance?
First, let’s review what a merchant cash advance is. A merchant cash advance is a form of business financing where a company gives you an upfront lump sum of cash in exchange for a percentage of your future credit card and debit card sales. There are usually no fixed monthly payments. Instead, the merchant cash advance company takes a fixed percentage of your daily credit card sales – typically between 10-20%.
The appeal is getting quick cash without having to qualify for a loan. But the costs can spiral out of control. Many companies fail to realize just how much will be deducted from their daily credit card sales. They end up unable to pay back the merchant cash advance company as quickly as expected.
Should You Pay Off a Merchant Cash Advance?
If you realize a merchant cash advance was a mistake, your instinct may be to pay it off as quickly as possible. But that can leave you cash strapped. Here are some pros and cons to consider:
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As you can see, there are pros and cons to both options. Paying off the balance quickly can stop daily deductions sooner. But it may cripple your working capital. Going slowly conserves cash but means owing for a longer term. Evaluate your specific situation to decide if you should pay off the balance ASAP.
Renegotiate Your Merchant Cash Advance
If you can’t pay off the balance quickly, try to renegotiate. Many merchant cash advance companies are open to renegotiating terms if you are struggling with payments. Be honest about your financial situation and ask if they can reduce the daily repayment percentage. Refer to your original contract to see if there are any clauses about renegotiating.
Going this route stops future deductions and may help you pay off the balance on better terms. But the merchant cash advance company is not obligated to change the original agreement. Negotiate politely but firmly. Have a backup plan if they won’t budge.
Explore Debt Consolidation
If renegotiating doesn’t work, look into debt consolidation. This rolls multiple debts into one new loan with lower monthly payments. The goal is paying off debts faster by securing a lower interest rate. This NerdWallet article has more details on how debt consolidation works.
Consolidating high-interest debts like credit cards or payday loans into a new loan can potentially get you better repayment terms. But merchant cash advances usually have interest rates over 100%. Debt consolidation may not reduce the rate much. Run the numbers to see if consolidation offers any savings on your merchant cash advance.
File for Bankruptcy
If your business is failing and you see no way out, bankruptcy may be an option. This legally discharges many debts. But talk to a lawyer first. Declaring bankruptcy has long-term consequences. And it may not discharge merchant cash advance debts.
Merchant cash advance companies argue their products are not “loans” but rather the purchase of future receivables. So they may be exempt from bankruptcy discharge. The legal precedents are still evolving. But bankruptcy could erase some of your debts while letting you repay the merchant cash advance over time.
Some businesses have succeeded in cancelling merchant cash advance debts by claiming “unconscionability.” This argues the terms were so unfair and one-sided that the contract should not be legally enforceable.
Claiming unconscionability often requires proving:
- You had no reasonable alternative options when signing (financial distress)
- The merchant cash advance terms were grossly unfavorable
- The contract involved deception or misrepresentation
If you can show the merchant cash advance company exploited your financial hardship to trap you in an outrageously unfair contract, the debt may potentially be cancelled. I’d recommend contacting a lawyer to discuss the unconscionability defense.
Negotiate a Settlement
If bankruptcy or unconscionability don’t apply, try negotiating a lump-sum settlement. Offer to pay a smaller amount as full satisfaction of the debt. Start very low, citing financial hardship. Many merchant cash advance companies would rather take a smaller guaranteed payment than force you into bankruptcy and get nothing.
Settlements typically range from 25% to 50% of the remaining balance. But any settlement is better than paying the full amount if you have no hope of doing so. Make it clear you’re offering a settlement because it’s the only realistic option. See what they’ll accept to cancel the remaining debt.
Change Your Credit Card Processor
This drastic step cuts off the merchant cash advance company’s access to your credit card sales. Stopping the daily deductions gives you leverage to negotiate. They lose their collateral if they can’t take payments directly from your processor.
But beware – merchant cash advance contracts often have clauses prohibiting changing processors. And the company could sue for breach of contract. I only recommend this nuclear option if you’ve tried everything else and have no assets left to lose in a lawsuit. Consult a lawyer before changing processors to avoid potential jail time for contempt of court.
Avoiding Merchant Cash Advances in the Future
If you get out of your merchant cash advance, it’s wise to avoid this type of financing in the future. Here are some safer funding options:
- Bank loans – Higher approval standards but much lower costs
- Business credit cards – Revolving credit helps manage cash flow
- Angel investors – No repayment unless your startup succeeds
- Factoring receivables – Sell invoices to get cash upfront
Merchant cash advances seem tempting but can wind up costing your business way more than expected. Stick to more ethical financing options that won’t put your company at risk!
I hope these tips help if you regret taking a merchant cash advance. Don’t panic, be persistent, and explore every option. With some diligence, you can find a solution and get your business back on track!