Getting Relief from Merchant Cash Advance Debt
Merchant cash advances can seem like an easy fix when your business needs fast cash. But those quick funds can turn into a big 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 restructure the debt to avoid default.
What is a Merchant Cash Advance?
A merchant cash advance (MCA) works differently than a traditional small business loan. With an MCA, a funding company purchases a portion of your future credit card receipts at a discount.For example, they may give you $100,000 upfront in exchange for $130,000 of your future credit card sales over the next 18 months. That extra $30,000 represents the fee you pay for the advance.You’ll pay back the advance in daily or weekly installments that are automatically withdrawn from your bank account – usually around 10-20% of your daily credit card receipts. The fees and payment structure essentially make it a very high interest rate loan.
The Risks of Merchant Cash Advances
While MCAs provide fast access to capital, they come with some big risks:
- Extremely high fees – The equivalent annual interest rate often exceeds 100% when you calculate the fees.
- Daily/weekly payments – MCA payments are taken every day or week, which can quickly drain your operating cash flow.
- Personal guarantees – Most MCA agreements require a personal guarantee from the business owner, putting your personal assets at risk.
- Quick default – Missing just one payment puts your business in default. Then the MCA provider can take aggressive collection actions.
What to Do if You Default on an MCA
If you‘ve already missed a payment on your MCA, your business is technically in default. Missing any payment breaches (or breaks) the contract you’ve signed, at least according to the lender. When you default, it invokes the lender’s right to pursue you and your business.Here’s what happens if you default on a merchant cash advance, and what you can do about it:
1. Expect aggressive collections
Once you default, the MCA lender will likely turn your account over to professional debt collectors who specialize in recovering MCA debts.The collectors may harass you with constant calls, letters, and even lawsuits. Some may even try calling your customers about the debt.
2. Watch for confession of judgment
Many MCA agreements contain a “confession of judgment” clause. This allows the lender to obtain a judgment against your business without advance notice or a hearing.The lender can then seize assets, freeze bank accounts, and garnish wages based on the judgment. So it’s critical to act fast if you get behind on payments.
3. Consider debt consolidation
If you have multiple merchant cash advances outstanding, consolidation may help. This involves combining all the agreements into one new advance with lower fees.While it doesn’t erase the debt, consolidation can provide some immediate financial relief by lowering your daily repayment burden. Just be sure to read the fine print for any prepayment penalties on your existing advances.
4. Negotiate with the MCA company
Once you’ve analyzed your situation, it’s worth trying to negotiate directly with your MCA lender. Many providers would rather make some concessions than write-off the entire remaining balance. Be prepared to provide full financial documentation to support your position.Having an experienced business attorney on your side vastly improves the odds of negotiating a successful settlement. They understand MCA contracts inside and out and know which terms are flexible.
5. Explore bankruptcy
While bankruptcy generally won‘t erase an MCA debt, it can eliminate collection calls and lawsuits while halting asset seizures. This “breathing room” may provide time to restructure the debt and resume payments.Just be aware that personal guarantees on MCA advances typically survive bankruptcy. So the lender may still try to collect against your personal assets even after discharging the business debt.
Other Debt Relief Options
If you want to pay off an MCA for good, you’ll likely need to secure alternative financing at lower rates. Here are some options to consider:
- SBA loans – The SBA offers various low-interest loan programs to help small businesses get working capital and refinance debt. Loan amounts up to $5 million are available.
- Business lines of credit – Lines of credit provide flexible access to funds as needed. Interest rates are usually lower than MCAs.
- Invoice factoring – Factoring companies buy your unpaid customer invoices and advance 80-90% of the face value right away. Fees are based on the invoices, not a percentage of card receipts.
- 401(k) business financing – Some lenders allow you to use your 401(k) or IRA funds to invest in your own business. This avoids early withdrawal penalties and taxes.
- Crowdfunding – Online crowdfunding platforms let you raise funds from a large pool of investors. It helps if you have an established customer base.
Trying to resolve merchant cash advance debt on your own can be extremely challenging. An experienced small business attorney can help analyze your situation, negotiate settlements, and protect your assets.They can also assist with developing alternative financing solutions to help eliminate the MCA debt for good. Don’t wait to get professional help if your business has defaulted on a merchant cash advance agreement. Time is critical for preserving options.
What to Do If You Default on a Merchant Cash Advance
Getting a merchant cash advance (MCA) can be a great way for small businesses to access quick capital. But what happens if you default on an MCA loan? Don’t panic – there are steps you can take to remedy the situation.
First, let’s clarify what defaulting on an MCA actually means. Essentially, it means you’ve failed to make your scheduled payments as outlined in your MCA agreement.Each MCA provider has their own criteria for determining default status. But generally, missing multiple consecutive payments or being delinquent for an extended period of time (often 60-90 days) triggers default.Once an account goes into default, the MCA provider can take certain actions like:
- Charging late fees and higher interest rates
- Freezing the business bank account
- Demanding full repayment of the outstanding balance
- Suing the business owner for the balance
So taking swift action is key to avoiding further complications.
Reach Out Immediately
If you miss even a single payment, <u>contact your MCA provider right away</u>. Explain your situation openly and honestly. Oftentimes providers are willing to work with businesses experiencing temporary cash flow issues.For example, they may grant a short grace period before assessing late fees. Or set up an alternate payment plan with smaller installments over a longer repayment term.But the key is communicating proactively. The worst thing you can do is ignore calls or letters from your MCA company. This destroys trust and eliminates flexibility in resolving the issue.
Explore Refinancing Options
If the original MCA repayment terms are simply unmanageable, refinancing the balance may help. Compare offers from multiple alternative lenders to find the best rates and terms.A refinance could lower your payments and/or give you a longer period to repay the loan. Just be sure to choose a trustworthy lender and read the fine print closely before signing anything.Beware of predatory lenders charging exorbitant interest rates or fees. And confirm there are no restrictions or penalties for early repayment if you secure funds to pay off the balance faster.
Request an MCA Audit
In some cases, errors in the original MCA agreement lead to default. It’s possible you were charged higher payments or interest than originally outlined.If you suspect inaccuracies in your account, formally request an audit from the MCA provider. They should be able to walk you through the full payment history and source of any discrepancies.Be prepared to pay for a third party audit if unsatisfied with the MCA company’s explanation. If the audit uncovers errors in your favor, the provider would be legally obligated to refund any overpayments.
Attempt Debt Settlement
When refinancing isn’t feasible, <u>debt settlement could be an option</u>. This involves negotiating directly with the MCA provider to pay a lump-sum that’s less than the full outstanding balance owed.They get immediate payment, and you save money compared to paying off the account over an extended period. It’s generally wise to consult an attorney to handle settlement negotiations on your behalf.Success depends largely on the MCA company’s policies and your own financial position. They may balk if you have the means to repay the full amount over time. Prepare documentation showing inability to obtain financing and the business’ bleak revenue outlook.Even settling for a 75% reduced payoff amount requires having that money readily available. If not, the provider loses incentive to settle versus pursuing full repayment plus interest.
Explore Bankruptcy Options
While certainly not ideal, bankruptcy may be a last resort if you simply lack the means to repay your MCA debt. This legally eliminates or restructures debts you can’t reasonably handle.But for businesses, the only real option is Chapter 7 bankruptcy entailing complete business liquidation. You’d have to surrender all assets for distribution to creditors, including the MCA provider.So bankruptcy destroys your company in effort to escape overwhelming debts. Most business owners wish to continue operating, so view bankruptcy as an absolute final option if refinancing and settlement fail.And even if you do pursue bankruptcy, MCA providers can object to discharge of the debt if you used funds for ineligible purposes. So tread carefully before taking this permanent step.
Navigating default on an MCA can be incredibly stressful. Don’t go it alone – seek guidance from financial and legal professionals if needed.An attorney experienced with MCAs can review your agreement for compliance and represent you in settlement talks or bankruptcy court.A financial advisor can also help craft a repayment or funding strategy tailored to your situation. Utilize these experts as needed rather than scrambling alone.
Take Action ASAP
Dealing with an MCA default is not easy. But sticking your head in the sand makes things exponentially worse.Whether you can repay as agreed, refinance, settle, or file bankruptcy – prompt action is key. Know your rights and responsibilities.And communicate fully with your MCA provider to understand their policies and potential flexibility. With a cool head and patient negotiation, many defaults can be resolved without destroying the business.So don’t panic, weigh all your options, and take action ASAP if you default on an MCA loan. The sooner you address it, the more control you have over the outcome.