How To Restructure Merchant Cash Advance Debt


How To Restructure Merchant Cash Advance Debt

Merchant cash advances can seem like an easy solution when your business needs a quick injection of capital. Unlike traditional business loans, merchant cash advances don’t require a credit check or collateral. The funds are advanced based on a percentage of your future credit card and debit card sales. But those future sales can also become a burden when it’s time to pay back the advance. If your business has taken on more merchant cash advances than it can handle, you may need to look into restructuring the debt to avoid default. Here’s what you need to know:

Understand How Merchant Cash Advances Work

With a merchant cash advance, a funding company essentially purchases a portion of your future credit card receipts at a discount. For example, they may provide $100,000 upfront in exchange for 15% of your credit card sales until $130,000 is repaid. This is different than a loan because the payments fluctuate based on your sales volume. There’s no fixed monthly payment or interest rate.

The benefit is you get quick access to capital without strict eligibility requirements. The potential downside is that the payments can become unmanageable if sales drop unexpectedly. It’s not uncommon for businesses to take out multiple merchant cash advances as a quick fix when they’re strapped for cash. Before long, a large percentage of daily credit card receipts are already committed to paying off advances.

Evaluate Your Current Payment Obligations

The first step is to take stock of all your outstanding merchant cash advances. List each agreement, the amount advanced, the payback term, and the percentage or fixed amount deducted per credit card transaction. Calculate the total deduction percentage across all agreements. If it exceeds 15-20% of daily sales, you likely have a problem.

Next, compare your actual credit card receipts to the anticipated amounts in the agreements. Are sales lower than expected? That means more of each transaction is going toward fees rather than profit. Look at seasonal trends too. A slow period may put you underwater for months until business picks back up.

You’ll need all this information to determine if restructuring makes sense. The goal is to reduce the payback burden to a manageable level. But first you need to understand the true scale of the problem.

Consider Your Restructuring Options

If it’s apparent your merchant cash advance debts are unsustainable, you have a few options to restructure:

  • Consolidation – Combine multiple agreements into one new advance with lower fees
  • Lower daily payback percentage – Reduce the percent taken from each transaction
  • Extended term – Lengthen the payback period to reduce daily burden
  • Refinancing – Pay off merchant advances with a lower-cost loan

The best approach depends on your specific situation. Consolidation makes sense if you have multiple advances charging high fees. But you may still face the same heavy daily deductions. Lowering the percentage deducted per transaction can provide more immediate relief. Extending the term reduces the daily burden but increases the total interest paid over time.

Refinancing with a bank loan is an option if you have the credit profile and collateral to qualify. You get much lower interest rates and predictable payments. Just beware of prepayment penalties with your existing advances.

Negotiate With Your Merchant Cash Advance Company

Once you’ve analyzed your situation and identified the ideal restructure terms, it’s time to negotiate. Don’t expect your merchant cash advance company to voluntarily offer relief. You’ll likely need to make the first move:

  1. Explain why your current repayment schedule is unworkable based on actual sales trends.
  2. Propose new terms that reduce the burden and let you get back on track.
  3. Be prepared to provide detailed sales data to justify your request.
  4. Consider making a good faith partial repayment if possible.

Having a specific restructure proposal with concrete logic behind it gives you the strongest negotiating position. The company may initially reject it or counter with less favorable terms. Be willing to negotiate to land on a middle ground. Getting a 15% reduction in fees may be better than nothing.

Understand the Company’s Incentives

It’s important to realize the merchant cash advance company faces disincentives to help you. They already provided the lump sum payment upfront. If your business fails, they absorb the loss. So they may prefer to drive you into bankruptcy versus voluntarily reducing their payback.

However, if they believe your business is fundamentally sound and the issue is temporary, they have an incentive to work with you. Taking a modest reduction in fees is better than forcing you to close shop and recovering nothing. You need to convince them it’s in their interest to compromise.

Explore Legal Options as a Last Resort

If negotiations reach an impasse, more aggressive legal options may be on the table. For example:

  • Breach of contract claim – If you can show the company misrepresented potential repayment terms, you may invalidate the agreement.
  • Usury laws – If fees exceed state limits on interest rates, the contract could be void. But usury doesn’t apply to merchant cash advances in all states.
  • Unfair practices claim – Some state consumer protection laws prohibit unfair lending practices.
  • Bankruptcy – Filing Chapter 11 or Chapter 7 bankruptcy allows you to restructure or discharge debts.

Tread carefully here and consult an attorney. The company will likely fight back with aggressive collections tactics. Lawsuits are expensive, time-consuming and uncertain. But they provide leverage if refinancing and negotiations fail.

Avoid Letting the Situation Worsen

As difficult as merchant cash advance problems can become, the worst thing you can do is ignore them. Missed or late repayments result in penalties and default provisions that make matters much worse.

Stay in close communication with the funding company even if you’re struggling to make daily payments. Be proactive about refinancing or renegotiating terms before it reaches a crisis point. Protecting your business’s long-term health should be the priority.

With the right financial management and negotiating tactics, you can regain control of cash flow being diverted to merchant cash advance fees. Don’t wait until it’s too late.

Restructuring finance concept image

Key Takeaways

  • Consolidating multiple merchant cash advances can help lower fees.
  • Try negotiating a lower percentage taken from daily credit card sales.
  • Extending repayment terms reduces the immediate burden but increases total interest.
  • Refinancing with a lower-cost business loan is an option if you can qualify.
  • Explore legal options as a last resort if negotiations fail.
Restructure Option Pros Cons
Consolidation – Lower fees – Repayment still challenging
Lower % deducted – Quick cash flow relief – Increased total interest over time
Extended term – Smaller daily payments – More interest paid overall
Refinancing – Lower interest rates – Need to qualify for new loan

With careful planning and negotiation, you can restructure unsustainable merchant cash advance debt. Don’t wait to take action if repayments are crippling your business’s finances. There are always solutions available with the right strategy.

For more help managing business finances, check out the SBA’s guide to small business loans or these merchant cash advance tips from Fundera. And be sure to consult an accountant or attorney before making major decisions about restructuring debt. With the proper advice, you can ensure the best outcome for your unique situation.

Navigating Merchant Cash Advance Debt Settlement

Merchant cash advances have become an increasingly popular way for small businesses to access quick capital. However, the high repayment rates and daily debits can sometimes push businesses into financial distress. If you’ve fallen behind on your merchant cash advance payments, debt settlement may be an option to resolve the debt under more affordable terms.

In this comprehensive guide, we’ll walk through everything you need to know about settling your merchant cash advance debt, including how the process works, key laws and regulations, potential defenses against repayment claims, and the pros, cons and implications to consider before pursuing settlement.

How Merchant Cash Advance Settlements Work

Merchant cash advance (MCA) providers offer an upfront lump sum payment to a business in exchange for the rights to collect a percentage of the business’s future credit card and/or debit card sales. The payments are automatically debited daily from the merchant’s bank account via ACH transfer.

The cost of an MCA is very high compared to other financing options. The payment program essentially functions as an extremely high interest loan, with effective APRs often exceeding 100%.

Hand exchanging money

If a business falls behind on its daily payments, the provider can immediately initiate collection efforts and file suit to recover the full outstanding balance. However, businesses do have leverage to negotiate a settlement for less than what’s owed. The general process involves:

  • The merchant stops making daily MCA payments
  • The MCA provider issues a demand letter and/or files a lawsuit
  • The merchant negotiates a lump sum settlement amount
  • The merchant makes the settlement payment, and the MCA debt is resolved

Having an attorney assist with the negotiation can help secure more favorable terms. Settlement amounts typically range from 30% to 60% of the unpaid balance. The goal is to reach a compromise that allows the business to move forward in a more stable financial position.

Key Laws and Regulations

Merchant cash advances occupy a gray area in lending regulations. Here are some key considerations regarding applicable laws:

No Usury Lending Caps

Unlike loans, MCAs are not subject to state laws capping interest rates. Providers can circumvent usury laws because the payments are structured as a purchase of future receivables rather than a credit agreement. This enables MCA providers to charge very high effective interest.

No Truth in Lending Act Disclosures

The Truth in Lending Act (TILA) requires lenders to disclose the annual percentage rate (APR), total cost, and other key loan terms. However, MCAs again avoid this regulation because they are not considered loans. Merchants enter the agreements without clarity on the true repayment cost.

Consequences of Breach of Contract

Not making the daily payments constitutes a breach of contract. The provider can sue for damages equalling the full outstanding amount owed, as well as legal costs and fees. Defending against such lawsuits can be challenging absent proper documentation of deceptive practices or other contract defenses.

While regulation of the MCA industry remains limited, there have been recent efforts at both the state and federal level to introduce more oversight and transparency standards. However, merchants currently must rely on their contract rights and ability to negotiate to reach an affordable payoff amount on unaffordable MCA debt.

Potential Defenses Against Repayment

If sued for nonpayment of a merchant cash advance, there are defenses that a merchant can raise to fight against a provider’s claims:


If the terms of the MCA agreement are unfairly and grossly imbalanced, a merchant may claim the contract is unconscionable. Factors supporting unconscionability include interest rates far exceeding 100% APR and a lack of understanding of the repayment terms.

Fraud and Misrepresentation

If the provider made false statements about repayment terms or other elements of the agreement, the merchant may be able to void the contract. Clear evidence of intentional deception is required.

Breach of Covenant of Good Faith

If the provider did not act ethically in establishing or administering the agreement, a merchant may claim breach of the covenant of good faith and fair dealing. This argument has succeeded in some cases per court rulings.

Violation of State Laws

Predatory lending laws, usury caps, and other state regulations may be used to try to invalidate the MCA agreement, particularly if the business is especially small or unsophisticated. Consultation with a lawyer knowledgeable in state commercial finance laws is key.

While challenging the validity of an MCA contract is possible, it involves time-consuming litigation with uncertain outcomes. Most merchants seek to settle outstanding balances as efficiently as possible. Asserting defenses lays groundwork for negotiating a reasonable settlement based on the provider’s risk of losing in court.

Benefits of Pursuing MCA Debt Settlement

Settling outstanding merchant cash advance debt for less than the full amount can provide multiple advantages:

  • Lower payoff amount – Most settlements resolve the debt by paying 30% to 60% of the remaining balance.
  • No more daily debits – The constant payments stop, preserving capital.
  • Avoid litigation – Settling quickly avoids a potential drawn-out legal battle.
  • Tax benefits – A portion of the settled debt that is forgiven may be tax deductible.
  • Peace of mind – Eliminating the MCA burden helps relieve financial stress.

For merchants facing cash flow struggles, settling outstanding MCA debt often represents the quickest and most cost-effective path to financial stability.

Risks and Downsides of MCA Debt Settlement

While settlement often makes sense, there are some potential downsides to understand:

  • Tax implications – Forgiven debt may be taxed as income, so consult a tax professional.
  • Credit damage – Defaults and settlements often damage business credit scores.
  • Balloon payment – Settlement requires a large lump sum, which can be difficult to secure.
  • Reputation impact – Defaulting can harm the merchant’s reputation with the MCA provider and other financiers.

Business owners should consider these factors before halting payments to an MCA provider. Assessing available capital and credit options in advance is crucial to ensure capacity to fund a settlement.

What to Do If Considering MCA Debt Settlement

If struggling to afford your merchant cash advance payments, here are some important steps to take:

  1. Consult an attorney – An experienced legal advisor can assess defenses and negotiate effectively.
  2. Gather documentation – Compile all agreements, correspondence and account records.
  3. Assess finances – Review cash flow and options to fund a settlement payment.
  4. Consider credit impacts – Weigh benefits against potential score damage of defaulting.
  5. Negotiate – With counsel, negotiate the lowest possible payoff amount.

The attorney can also help prepare for and defend against a potential lawsuit if the MCA provider initiates legal action. Timely settlement negotiations, before court claims arise, generally provide the most favorable resolutions.

Finding the Right Settlement Terms

There are no hard rules on appropriate settlement amounts, as each situation involves unique circumstances. In general, experts recommend targeting a 30% to 60% payoff if possible. The most advisable course is to start lower and negotiate up toward an amount the business can afford. Consider leveraging the following angles:

  • Highlight precedents of providers settling within the target range.
  • Note that litigation takes time and legal expenses with an uncertain outcome.
  • Emphasize willingness to resolve amicably and preserve future relationship.
  • Frame the settlement as the best way for the provider to minimize losses.

Remaining firm but fair can help secure a settlement that eliminates the debt burden under manageable terms. Just be sure to obtain official documentation that the settlement payment satisfies the debt in full.

Consult an Attorney to Assess Your Situation

The potential complexities around settling MCA debt underscore the importance of retaining legal counsel. An attorney experienced in MCA agreements can advise if you have grounds to challenge contract terms. They will also handle settlement negotiations in your best interest.

Do not accept a provider’s claims at face value or let threats of legal action intimidate you. Research qualified lawyers to find an advocate who will protect your rights in seeking the optimal debt settlement. With the right help, you can resolve your MCA debt for a fraction of what you owe and avoid further economic harm from excessive payments.

Useful Resources

Here are some helpful websites with more information on merchant cash advances and debt settlement:

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