5 Reasons Taking a New MCA to Pay Off an Old One Will Destroy Your Business

The new advance does not retire the old debt. It relocates it, at a higher price, to a different creditor who now owns a larger portion of your future.

Every broker who calls with this offer describes it as a solution. "We will pay off your existing MCA and give you one lower payment." The arithmetic, when you perform it yourself rather than accepting the broker's version, tells a different story. The payoff amount on your current advance includes the funder's remaining profit on the original factor rate. The new advance must be large enough to cover that payoff and the new funder's factor rate. You are paying a premium to exit a premium. The total cost of capital has not decreased. It has compounded.

This is the single most destructive financial decision a small business owner can make in the MCA space, and it is the decision that is most aggressively marketed to owners who are already in distress.

The Factor Rate Compounds Against You

A factor rate is not an interest rate, though it functions like one with a critical difference: it does not adjust for early repayment. If you received $50,000 at a 1.4 factor rate, you owe $70,000 regardless of how quickly you repay. The $20,000 cost is fixed from the moment the contract is signed.

When a new MCA pays off the old one, the payoff amount is the remaining balance at the original factor rate. If you have repaid $40,000 of the $70,000, the payoff is $30,000. The new advance must cover that $30,000 plus whatever additional capital you receive, and the new factor rate applies to the entire new principal.

If the new advance is $80,000 at a 1.45 factor rate, you now owe $116,000. You received $50,000 in usable capital (the $30,000 went to the old funder), and you owe $116,000 for it. The effective cost of the original $50,000, after two rounds of factoring, is $66,000. That is a cost of capital that would be recognizable as predatory in any other context.

It is recognizable here, too. Most people simply do not perform the calculation until after they have signed.

The New Funder Inherits the Old Funder's Contractual Rights (And Adds Its Own)

The new MCA agreement is a new contract with new terms, a new UCC-1 filing, a new personal guarantee, and frequently a new confession of judgment. The old funder's lien is released upon payoff (if it is released at all; in some cases, the old UCC-1 remains on file until manually terminated). The new funder's lien replaces it.

But here is the detail that matters: the new contract was drafted for a higher-risk borrower. You. The terms reflect the funder's assessment of your current position, which is the position of a business that could not sustain its previous MCA. The default triggers may be broader. The reconciliation clause may be more restrictive. The personal guarantee may be more expansive.

You signed the first contract as a borrower. You signed the second as a risk.

Each successive agreement is calibrated to the funder's increasing certainty that default is probable. The contractual protections available to you narrow with each round, because the funder who extends credit to a business already struggling with MCA debt does not do so out of generosity. They do so because the terms of the new agreement compensate them for the risk, and those terms are paid by you.