Options If You Can No Longer Afford Merchant Cash Advance Payments
Options If You Can No Longer Afford Merchant Cash Advance Payments
Merchant cash advances can seem like an easy solution when your business needs quick funding, but they can become difficult to manage if your sales decline. If you can no longer afford the daily repayments on your merchant cash advance, you have a few options to consider before defaulting.
Understand How Merchant Cash Advances Work
First, it’s important to understand how merchant cash advances (MCAs) work. An MCA provides you with a lump sum of capital upfront, which you repay by allowing the lender to take a percentage of your daily credit card sales. This is called the “holdback rate” and is usually between 10-20% of daily sales.
Unlike a loan, there is no set repayment schedule. The lender will continue taking the holdback percentage every day until the full advance amount plus fees is repaid. This structure can become problematic if your sales volume decreases, as it will take longer to repay the advance.
Calculate the True Cost
Many business owners don’t realize how expensive MCAs can be until issues arise. MCAs often have an annual percentage rate (APR) between 60-200% . Before taking any actions, calculate the true cost of your MCA:
- Advance amount received
- Holdback percentage
- Fees charged
- Factor rate (usually 1.1-1.5 times the advance amount)
This will help you understand the total cost and make informed decisions. Online MCA calculators can help determine your costs.
Increase Sales Volume
The fastest way to repay your MCA is to increase sales volume, especially credit card sales. Consider running promotions to attract new customers and encourage existing ones to spend more per transaction.
You may need to use some of the MCA funds on marketing and advertising to generate more sales. This will get you back on track with payments quicker.
Renegotiate the Agreement
Contact your MCA lender explain that you are struggling to make the daily payments. See if they are willing to renegotiate the holdback percentage or repayment structure.
Many lenders would rather work with you than lose out on the advance entirely. They may agree to lower the holdback rate to 5-10% so you can repay the advance over a longer period. Just beware of any fees for modifying the agreement.
Refinance with Another MCA
If your current lender won’t negotiate, you may be able to pay off your existing MCA by refinancing with another provider. This can lower your holdback percentage, but make sure to calculate the costs.
Refinancing rolls your balance into a new agreement. You need to be able to handle the payments or you could end up even further in debt.
Seek Alternative Financing
Rather than refinancing with another MCA, you may want to consider other financing options:
- Business credit cards – Can provide revolving credit to cover short-term needs.
- Business term loans – Offer fixed monthly payments and may have lower rates.
- SBA loans – Government-backed loans with long terms and competitive rates.
These alternatives can help you pay off the existing MCA and establish more affordable long-term financing. Your personal or business credit score needs to be in decent shape to qualify.
Negotiate a Settlement
If refinancing isn’t an option, negotiate directly with the MCA lender to settle for a lump-sum discounted payoff amount. Many lenders will agree to settle for 70-80% of what you still owe in order to get out of the agreement.
You can raise the lump sum through business loans, personal loans, friends/family, credit cards, or retirement savings. This option provides a clean break from the MCA.
Claim Inability to Repay
As a last resort, consult an attorney about claiming you are financially unable to repay the MCA. There may be protections under state laws if you can prove unaffordability.
Stopping payments without legal grounds could prompt the lender to sue your business for the balance. Be prepared for them to potentially seize assets or pursue judgements.
Don’t Make Matters Worse
Most importantly, take steps to stabilize your financial situation. Do not take out additional funding or drastically cut expenses in a way that hurts revenue. Reducing staff or marketing spend can inadvertently make repaying the MCA even harder.
Carefully manage cash flow and trim excess costs until you have an affordable repayment plan or alternative financing in place. With the right approach, you can resolve issues with merchant cash advances.