5 Debt Relief Offers That Are Actually New Advances in Disguise

Businesses behind on one or more stacked merchant cash advances get solicited from numerous players offering “debt relief”, “consolidation” and similar “low monthly payment” solutions. The problem is that many of the offers are actually new merchant cash advances on top of the old ones, and can be disastrous for a struggling business. To tell them apart, focus on these three questions: is it a loan or purchase of your future receivables, will it pay off any old advances, and what is the total payback (total cost to pay the advance off).

1. The “consolidation” call

You’re drowning in merchant cash advances and some of the calls you’re getting are offering “consolidation.” The guy on the phone may even say it’s “consolidating” or “settling” your old debt, but when you read the contract, it will say they purchased your future receivables - just like the other merchant cash advances, but on top of them. Watch the contract, it will say something like “purchased amount, specified percentage and factor rate”. But as you fall behind you will start to get more calls from another set of advance companies offering “consolidation,” and it can become a self perpetuating cycle. On these calls, note that in March 2024 the FTC announced an amendment to the Telemarketing Sales Rule that has extended its coverage to business-to-business calls. Under the new version of the Rule, deceptive and misleading statements made in a business context that do not involve a consumer sale are now covered. Your mission: do not take on new debt that puts your business at greater risk or has the potential to send you into a spiral of non-stop calling and new short term debt on top of old short term debt.

2. The reverse consolidation

Here, the new funder is “putting a blanket” over your existing advances and covering each advance payment for you, supposedly reducing your total weekly outlay. Look closer. You will start receiving a weekly deposit from the new funder, and have a payment obligation back to it. Have you paid off your old advances? You will be paying them back on top of the new advance. It is not really a consolidation, you have just added another advance to the stack. The cheaper offers often have you pay over a longer period, which means your total repayment can be higher than the shorter term solutions. The new funder will need to see recent bank statements and determine if there is room in your deposits to take on the new advance and still have enough revenue coming in to operate and cover costs. It is designed for a business still performing, not one already in default.

3. The funder buyout

A funder might make you an offer to pay off the balances of your existing merchant cash advances with a new one. The new advance has a new agreement and a new repayment, and most likely will be for a higher amount. You have traded one obligation for another. And, over the lifetime of the new advance, you will generally end up paying back more than you owed on the original advances. In New York, the new loan or purchase offer must itemize the funds provided to you directly, with a separate list of funds paid to any other party on your behalf. In California, the disclosure must note that the cash paid to you may change if the funder pays down other debts.

4. The renewal

The “renew” terms can be toxic: lender finances a new advance to cover the old one. Looking at the new numbers, you may think that after paying the new advance off, you will have enough money to get back on your feet. But it is not an easier repayment, just a new set of payments. Another peril: owners describe a hamster wheel, each new advance on top of the old ones. As you go down the road, your opportunities narrow. Daily withdrawals and higher repayment amounts can shrink the advance amount you can get. And no payoff date in sight. In New York, there are additional rules for renewals. The funder must disclose if any of the renewal amount goes to pay unpaid fees or finance charges, which the rule calls “double dipping.”

5. The “refinance” that pays nothing off

When is a refinance not a refinance? A “refinance” is sometimes just another way to describe the new layer added to your stack of advances. There are two signs that it is a “MCA refinance”: the old advances are not retired at closing, and each of the old advance funders continue to draw their original repayments from your deposits. Your bank deposits may look different but your business still has the same debt burden, if not more. Compare the total amount of money you will repay under any new advance, fees included, with the money you owe now. A lower weekly payment stretched over a longer period may give you a longer runway, but the total amount repaid to the funder might be higher over the long haul.

Labels Can Be Misleading

”Revenue contracts,” “factoring contracts,” “debt consolidation” contracts, and other labels can be misleading: In New York, the Attorney General said Yellowstone Capital contracts described the deals as purchases of future revenue with flexible payments, but in reality the lenders took fixed daily debits from the merchant accounts for fixed periods like 90 days. Whatever label the new advance uses, ask about the payments: What will you have to repay, and how much will you be required to pay every day or week?

The Better Loan Solutions

The better loan solutions typically require you to be current on your advances. They typically pay off each advance in full. But remember, if already behind and in default you will probably not be considered for a conventional term loan. You may need to look at a settlement plan, where you make one reduced weekly payment into an escrow account, and then the balances are negotiated, aiming to settle each for less. Over-aggressive funders may try to escalate to calls, liens or a lawsuit, so be ready for tough negotiations. If a balance is settled, the Internal Revenue Service generally requires you to treat debt forgiven for less than the amount owed as taxable income. It might be excluded to the extent you were insolvent, using Form 982. But ask questions and keep your eyes on the prize - you want to make sure you are walking out the door with a lighter debt burden than when you walked in.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.