A merchant cash advance (MCA) is a financing solution for small businesses, but it comes with plenty of risks. Unlike other types of business loans, your loan is based on your future business revenue, and your lender automatically takes a portion of that revenue as payment.
On top of the existing risks of MCAs, they can become even riskier when you use a practice known as MCA stacking, which is when you take out multiple MCAs at once. Unfortunately, this practice is quite predatory and can lead to an unbreakable cycle of debt for business owners.
If you’re considering MCA stacking or you’ve already done so for your business, it’s essential to understand the potential risks, how to manage your MCA stack, and alternatives to consider.
What Is MCA Stacking and Why Do Businesses Use It?
MCA stacking is when a business takes out multiple merchant cash advances. Each MCA provider gets a percentage of the business’s revenue, meaning the business owner is making multiple payments — likely daily or weekly — to various lenders.
In many cases, business owners resort to MCA stacking if they’re in a difficult financial spot and need additional capital to keep their companies afloat.
For example, maybe a new business owner doesn’t have sufficient initial funding and thinks an MCA stack can help them overcome it. In other cases, it may be a result of a business financial emergency. And in other situations, poor credit or low revenue may prevent them from qualifying for more traditional forms of financing.
Why MCA Stacking Can Be Risky for Your Business
MCA stacking comes with plenty of risks for your business, so it’s important to be cautious before doing it. Here are some risks to consider:
Increased Debt Burden and Cash Flow Strain
The more MCAs you take out, the more debt you put your business in. An increased amount of debt can put a financial strain on your business. Not only does it become more difficult to repay your debt, but you’ll also have less money to spend on other goals and priorities, whether it’s working capital or growing your business to the next level.
At first, it may seem like the cash influx from the MCAs may be just what your business needs to grow. But once you’ve used the funds, you’ll still have ongoing financial obligations until you’ve repaid all the MCAs.
High-Interest Rates and Compounding Repayments
MCAs have notoriously high interest rates (more commonly known as factor rates). While your rate may vary from one MCA and one lender to the next, you can expect it to be higher than you would pay for a traditional loan.
For example, you might have an MCA with a factor rate of 1.5. If you had a $100,000 MCA with a 1.5 factor rate, you would ultimately repay $150,000. In other words, the amount you’ll pay in interest amounts to half of the original loan principal.
Risk of Default and Business Instability
Putting your business into more debt than you can afford to repay is bound to create instability. With less money to put toward savings and other obligations, you’re more likely to have a situation where you can’t pay all of your bills. Unfortunately, this means an increased risk of default, which could present a whole slew of legal challenges, including lawsuits from lenders.
Violations of Existing Loan Agreements
In some cases, MCA stacking may be a violation of your MCA agreement. For example, one MCA provider may have a stipulation in their agreement that you can’t simultaneously take out multiple MCAs. And if you breach your contract, you could have other problems to deal with.
How to Manage and Reduce MCA Stacking Debt
If you’ve already taken out multiple MCAs, it’s important to take steps now to manage and reduce your debt to prevent it from harming your business.
Strategies for Handling Multiple MCA Repayments
Handling multiple MCA payments can be tricky, but it’s possible if you take the right precautions. Here are a few tips to help you handle multiple MCA repayments:
- Analyze your MCA situation: It’s important to get very clear about your MCA situation. You should know exactly how much you owe, the interest rates on your debt, and how much you’ll pay daily or weekly. There should be no surprises.
- Get on a budget: Part of managing such a large amount of debt is knowing exactly where your money is going. Analyze your business’s cash flow and create a budget.
- Reduce business expenses: If possible, look for other areas in your business budget to cut back. While this won’t always be possible, it will make it easier to repay your MCA.
- Seek expert help: If you’re struggling with your MCA, don’t feel like you have to go it alone. Consider speaking with a MCA debt attorney or another experienced MCA expert who can help advise you about repaying multiple MCAs.
Negotiating Better Terms with Lenders
If you’re having a hard time making the payments on your multiple MCAs, explore whether it’s possible to seek reconciliation. Some MCA agreements have a reconciliation clause in their agreements that allows a business to restructure their payment terms if they’re facing financial hardships.
To work out a reconciliation, you should work directly with your MCA company, provide documentation about your hardship, and find out what your options are. To have the appropriate protections in place before doing so seek out an MCA debt help attorney to guide you through the challenges of negotiating with MCA companies and their debt collectors.
Debt Consolidation and Refinancing
Debt consolidation and refinancing is another option for managing your MCA debt. When you refinance debt, you take out a new loan to pay off the original one. Ideally, you would use a more traditional business loan to pay off your MCA.
When you have multiple MCAs, as is the case in MCA stacking, then you can consolidate your debt. In other words, you take out a new business loan to pay off all of your MCAs at once if your credit allows. Then, you’ll be able to get rid of your daily or weekly MCA payments and have just one monthly payment, likely at a lower interest rate than you’re currently paying.
Debt Settlement
If reconciliation and refinancing aren’t available to you and you’re having a hard time making your MCA payments, you can consider debt settlement instead. When you settle your debt, you negotiate with your lender (or in this case, lenders) to reduce the balance on your debt. This may require you to pay off the full balance in a lump sum, but it can help you save money and avoid other possible consequences, such as a lawsuit from one or more of your MCA lenders.
If you’re considering debt settlement, it may be wise to consult an MCA attorney with experience in this area. You’ll likely get a better result than if you attempt the negotiations alone and the attorney could help protect the business from lawsuits and UCC lien issues.
Alternatives to MCA Stacking
MCA stacking isn’t your only option if you need capital for your business. Here are some alternatives to consider:
Refinancing Existing MCA Debt
Rather than taking out a second (or third) MCA to have additional capital in your business, consider finding a way to reduce the burden of your first MCA. If you can refinance your MCA and lower your payment, you’ll free up more money to use for other purposes.
Equipment or Inventory Financing
Equipment and inventory financing use your business’s assets to secure a business loan. They may be good options for borrowers who don’t qualify for traditional business financing but who would rather avoid an MCA. Because these loans are secured, they may have lower interest rates than an MCA, reducing the burden on your business’s finances.
Invoice Factoring for Business Cash Flow
Invoice factoring is a type of financing that’s secured by your unpaid invoices. Essentially, you sell your unpaid invoices to a lender. The lender gives you money, and then collects the payment from your customer when they pay the invoice. Invoice factoring is similar to an MCA in that it’s based on your future business revenue, but it tends to be more affordable.
Business Line of Credit as a Sustainable Option
A business line of credit is a financing tool that allows you to borrow up to your credit limit at any time you need it. It’s more flexible in that it allows you to borrow some or all of your credit limit and only repay the portion of the credit line you used.
It’s also a sustainable option since it allows you to borrow from your credit limit as many times as you want, as long as you stay under the limit. A traditional business line of credit is likely to be more affordable than an MCA.
Need Help With Your MCA Debt?
MCA debt is a trap that many small business owners fall into when they’re trying to grow or overcome financial difficulties. If you need help dealing with your MCA debt or MCA stack, an MCA debt relief attorney may be able to help.
Here at Tayne Law Group, we’ve been helping business owners deal with their MCA debt for more than two decades and can help you deal with yours. We offer free phone consultations where we can discuss your options and next steps. Call us at (866) 890-7337, or fill out our short contact form to schedule your consultation. All conversations are confidential, and we never share or sell your information.
