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How to Get Out of a Merchant Cash Advance

So you took out a merchant cash advance (MCA) for your small business, and now you’re having second thoughts. MCAs can seem tempting because you get money quickly without a strict credit check. But they can be super expensive, charging sky-high interest rates and taking a cut of your daily credit card sales.If you want out of your MCA, don’t panic. You have options. This guide will walk you through strategies like debt consolidation, settlement, and even bankruptcy to escape the grip of merchant cash advances.

Try Renegotiating First

Before pulling any drastic moves, your first step should be to contact your MCA lender and explain your situation. Be honest that you’re struggling to make the payments. Then ask if they can reduce your daily rate or give you a temporary reprieve from payments.The lender wants to get paid, so they may be open to renegotiating if it means you’ll actually pay them back. Be polite but firm in explaining exactly what you can afford. Have concrete numbers ready to back up your case.If the lender won’t budge on the repayment terms, you could also offer to settle the debt for a lump sum that’s less than what you owe. Make sure you have a number in mind based on what you can realistically pay.

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Consolidate the Debt with a Term Loan

If renegotiating doesn’t work, consider consolidating your MCA with a term loan that has lower interest rates. This can essentially refinance the debt into something more manageable.Online lenders like LendingClub or Funding Circle offer term loans up to $500,000 for small businesses. Banks also offer term loans, but may have stricter eligibility requirements.To qualify, you’ll likely need a credit score of at least 600 and 2+ years in business. The application process takes about a week. If approved, you get the lump sum to pay off your MCA and are left with set monthly payments on the term loan.

Explore Merchant Cash Advance Alternatives

Instead of taking out a term loan, you may want to replace your MCA with an alternative small business financing option:

  • Business Line of Credit: This gives you access to revolving credit up to a set limit. You only pay interest on what you use.
  • Invoice Factoring: You sell unpaid customer invoices to a lender for immediate cash. They collect payment from customers.
  • Equipment Financing: The lender buys equipment your business needs, then leases it back to you for payments.
  • SBA Loan: Government-backed loans with low interest rates and long repayment terms.

Research lenders to find the best rates and terms for your business. Having MCA debt won’t disqualify you, but lenders will review your credit and finances.

Attempt Debt Settlement

If refinancing isn’t an option, debt settlement may be a solution. This involves negotiating to pay a lump sum that’s less than you owe in exchange for the lender wiping out your debt.Many MCA lenders purchase debts for pennies on the dollar, so they may agree to settle since some money is better than default. Just keep in mind that settled debt can show on your credit report and still gets taxed as income.

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Consult an Attorney About Bankruptcy

For severely distressed businesses, bankruptcy may be the only way out. An attorney can advise if your situation qualifies for Chapter 7 liquidation or Chapter 11 reorganization.The process varies by state, but generally involves filing a petition, appearing at a meeting of creditors, and receiving discharge of eligible debts. Bankruptcy stays on your credit report for 7-10 years.

Increase Profits to Pay It Off

If your business is financially healthy overall, then the simplest route is to just pay off your MCA faster. First look for ways to increase profits, like:

  • Renegotiating contracts with vendors and suppliers
  • Cutting unnecessary overhead costs
  • Raising prices on profitable products or services
  • Marketing to higher-value customers

Also look for missed opportunities to boost revenue, whether launching a new product line or exporting to international markets.

Make Operational Changes

Another option is to make strategic changes to your operations to minimize the MCA’s impact:

  • Switch to a payment processor that takes a smaller cut of transactions
  • Change banks to one that charges lower fees
  • Only accept cash for a period to keep credit card sales (and MCA payments) low
  • Sell the business and use the proceeds to pay off the MCA

Plan a Payment Strategy

If you want to keep the MCA, get serious about budgeting to plan payments. Some tips:

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  • Track cash flow daily and forecast trends
  • Cut discretionary spending to free up more cash
  • Ask vendors for extended payment terms
  • Use excess cash to make lump sum payments
  • Build an emergency fund for seasonal revenue dips

Explore Legal Options

Don’t immediately jump to settling or bankruptcy. An attorney can review your MCA contract and suggest defenses to stop collections lawsuits. For example:

  • The MCA agreement may be invalid if it violates state lending laws.
  • You may argue the MCA is “unconscionable” if the terms are overly unfair.
  • There may be violations of the RICO Act or usury laws you can allege.

Even just hiring an attorney often makes lenders more amenable to negotiation. But move fast before the lender sues.

Don’t Lose Hope!

While MCAs are notoriously tough to escape, it IS possible with the right strategy and persistence. Don’t let predatory lenders win.The most important thing is to act quickly if you’re struggling with payments. Ignoring the issue only makes it worse. You have defenses, so don’t just give up!Review all your options, from renegotiating to bankruptcy, and decide the best path forward. Your business can recover with a little time and strategic adjustments. Don’t be afraid to ask for help from professionals like attorneys or financial advisors either.With the steps in this guide, you can take back control of your finances and break free of merchant cash advances for good. The process may be difficult, but the sense of relief and accomplishment will make it worthwhile in the end. 

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Getting Out of a Merchant Cash Advance

Merchant cash advances (MCAs) seem great at first. You get quick cash for your business without all the paperwork of a bank loan. But when it comes time to pay it back, yikes! The rates and fees can sink you fast. Here’s how to get out from under an MCA before it buries your biz.

Know Your MCA Contract Inside Out

You gotta understand exactly what you signed up for. Dig out that contract and read every word. An MCA isn’t a loan with set payments. It’s more like selling a chunk of your future sales at a steep discount. The MCA company takes a cut of your daily credit card sales until the balance is paid. And the contract likely says they can grab 15-20% or more right off the top!

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  • What’s the payback amount you owe?
  • How much of your daily sales do they take?
  • Did you lock in a set payback term or open-ended?
  • Are there other fees for non-payment, late fees, etc?

Get crystal on the terms before deciding your next move.

Try Renegotiating First

Believe it or not, MCA companies don’t want to sink you either. If you default entirely, they get zilch. See if you can rework the deal into something more affordable.

  • Ask for a lower percentage of sales. For example, 10% instead of 20%.
  • Extend the payback term. More time to pay means smaller bites out of each day’s sales.
  • Waive any fees like non-payment penalties, interest, etc.
  • Offer a lump-sum settlement – maybe borrowing from friends/family – to close the MCA at a discount.

Come armed with specifics on why the existing deal hurts your business. Be earnest but firm that you need relief. Many MCAs will play ball to salvage something vs. nothing if you go under.

Explore Refinancing Options

If the MCA company won’t budge, look at refinancing the balance with another lender:

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  • An online small business loan with set payments over time. Rates still high but more transparent.
  • A bank line of credit also works like a credit card, with minimum monthly payments.
  • Crowdfunded loans from peers with better terms.
  • Ask your landlord for a rent reduction to free up cash for the MCA.
  • A friends and family loan even on favorable terms beats predatory MCA rates.

Crunch the numbers to make sure refinancing saves money over the MCA – include all fees. Then submit applications until approved. Be wary of lenders touting “guaranteed approval” as these often have hidden costs.

Strategic Business Changes

Some other options to boost cash flow:

  • Renegotiate leases on equipment, vehicles, etc to reduce payments
  • Reduce inventory to pare costs
  • Institute cash discounts to incentivize early customer payment
  • Lay off staff if absolutely needed to cut payroll expenditure
  • Sell unneeded assets – put that old equipment online
  • Pause 401k match to conserve working capital

These tough choices buy time to pay off the MCA and right-size operations.

Explore Legal Options

If all else fails, consider legal action against the MCA company:

  • Research your state laws on usury – exorbitant interest rates – which may provide grounds to invalidate the MCA contract. But most states carve out exceptions for these “alternative financing” deals.
  • Prove deceptive practices like hidden fees the company snuck into the fine print without properly disclosing. This can nullify the agreement.
  • File complaints with regulators like the FTC or CFPB about predatory lending practices. They might apply pressure for refund or settlement.

But know lawsuits are costly and time-consuming with no guarantee of victory – especially with those iron-clad MCA contracts designed to withstand legal blows. Don’t go down this road lightly.

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When All Else Fails…..Bankruptcy

Bankruptcy lets you hit reset when debts snowball out of control. Filing stops collections and garnishments while the court sorts out payment plans. MCAs often get pennies back on the dollar.

  • Chapter 7 bankruptcy erases eligible debts outright. You surrender assets but retain others deemed essential.
  • Chapter 11 bankruptcy lets you restructure and modify debt under court supervision. Businesses commonly use this route.
  • Chapter 13 bankruptcy sets up a 3-5 year repayment plan on debt. You keep assets like cars or homes.

Bankruptcy wrecks credit and carries stigma and costs. But it stops the MCA bleeding and gives room to rebuild. Consult experienced bankruptcy counsel like Avvo before taking the plunge.——Merchant cash advances lure in business owners with easy money promises. But hidden gotchas in the fine print can lead to financial ruin. Take proactive steps – starting with reviewing the MCA contract terms – to remedy the situation. Act sooner than later for the widest range of options before things spiral out of control. With persistence and creativity, you can break free of the merchant cash advance debt trap!

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