The MCA Debt Spiral: How Stacking Advances Destroys Businesses

The Second Advance Is the First Mistake

No business owner takes a second merchant cash advance because the first one succeeded. The second advance exists because the first one consumed enough daily cash flow to create a deficit that the business cannot cover from operations. The second funder knows this. The broker who arranged it knows this. The business owner, by the time the second set of ACH withdrawals begins, knows this too, though the knowing comes too late to alter the trajectory.

Stacking is the practice of accepting multiple MCA advances simultaneously, each with its own daily withdrawal, each secured by overlapping claims on the same pool of receivables. It is not prohibited. It is not unusual. In the MCA industry, it is the architecture of repeat business. A funder who has extracted the first advance and observed that the merchant’s revenue can sustain the deduction has, in effect, identified a viable candidate for additional funding. The broker who placed the first deal earns a commission on the second. The incentive structure is aligned toward accumulation, not restraint.

The arithmetic of stacking is straightforward and catastrophic. A business generating $5,000 per day in revenue takes an initial advance with a daily payment of $600. The business can absorb this. A second advance adds $500. The combined daily withdrawal is $1,100, leaving $3,900 for all other obligations. A third advance, taken because the second compressed the margins further, adds $450. Now $1,550 leaves the account each morning before the business serves a customer. The margin for payroll, rent, inventory, and taxes has been halved. The business is not failing because demand has declined. It is failing because the cost of its own financing has consumed its operating capacity.

The Broker’s Incentive

The broker, or ISO, occupies a particular position in this structure. The ISO earns a commission on each advance placed, typically between 5 and 15 percent of the funded amount. A $100,000 advance generates $5,000 to $15,000 for the broker. A second advance on the same merchant generates another commission. A third generates another. The broker has no contractual obligation to assess whether the merchant can sustain the accumulated withdrawals. The broker’s fiduciary duty is, in most jurisdictions, nonexistent with respect to the merchant.

We have addressed this issue elsewhere, and we will return to it. For present purposes, the point is structural: the person who arranges the financing is compensated for volume, not for outcomes.

The spiral does not begin with the advance. It begins with the assumption that the advance will solve the problem it was designed to create.

What the Spiral Produces

The endgame of stacking is one of three outcomes: the business fails, the business defaults on one or more advances and faces concurrent collection actions, or the business owner contacts an attorney and attempts to intervene before the structure collapses.

In twelve cases we handled last year involving stacked advances, the average number of concurrent MCA agreements was three point four. The combined daily ACH withdrawals ranged from $900 to $3,200. In every case, the business owner reported that the second or third advance was taken on the recommendation of a broker who was also responsible for placing the first. In none of those cases did the broker provide a written assessment of the business’s ability to service the accumulated debt.

DEFENSE TEAM SPOTLIGHT

Todd Spodek

Lead Attorney & Founder

Featured on Netflix's "Inventing Anna," Todd Spodek brings decades of high-stakes criminal defense experience. His aggressive approach has secured dismissals and acquittals in cases others deemed unwinnable.

NY Bar Admitted Multi-State Licensed Federal Courts

Meet the Full Team

The legal tools available to a business in this position include challenging individual MCA agreements on usury grounds, seeking reconciliation of daily payment amounts, negotiating settlements with individual funders, and in some cases, filing for Chapter 11 protection under Subchapter V. The appropriate strategy depends on the specific contracts, the specific funders, and the specific financial condition of the business.

A conversation about that strategy begins with an assessment of the full picture: every contract, every daily deduction, every UCC filing. That assessment is what a consultation provides.