For seasonal businesses, a merchant cash advance (MCA) can seem like a quick solution to cover off-season expenses. But the high costs and daily repayments can quickly spiral out of control. Unlike traditional loans, MCAs come with aggressive repayment schedules that don’t adjust for revenue fluctuations, making them especially risky for businesses with seasonal income.
If you’re struggling with MCA debt, you’re not alone. The key to managing and repaying an MCA successfully is understanding your options, optimizing cash flow, and exploring strategies to restructure or refinance debt. Read on to learn how to regain control of your finances, resolve your MCA debt, and avoid future reliance on high-cost funding that can easily put your business into serious debt.
Overview of Seasonal Businesses
A seasonal business is a business that experiences significant fluctuations in demand during different times of the year. That usually translates to fluctuations in revenue as well.
Examples of seasonal businesses include holiday stores (like Christmas or Halloween), ski resorts, pool cleaning services, wedding planning, landscapers, restaurants in seasonal locations and even tax preparation services. These businesses typically generate the majority of their income during specific seasons and may have periods of low or even no activity during the off-season.
How Merchant Cash Advances Work
A merchant cash advance is a form of business financing where a company receives a lump sum of cash in exchange for a percentage of its future sales. MCAs are not loans, but rather structured as an advance on future revenue.
The repayment is typically made through daily or weekly deductions from the business’s credit card sales or bank deposits. The total repayment amount is determined by a factor rate (which typically ranges from 1.1 to 1.5), which is based on the businesses’ risk and projected future revenue. Because MCAs do not have fixed interest rates or strict credit requirements, they are popular among small businesses with inconsistent revenue or poor credit histories.
However, merchant cash advances come with high costs and can lead to financial strain. The effective APR on an MCA can be extremely high — sometimes exceeding 100% — due to the short repayment period and the way fees are structured.
Impact of Seasonality on Cash Flow
Seasonality can significantly impact a business’s cash flow by creating periods of high revenue followed by stretches of low or no income.
During peak seasons, businesses often experience a large inflow of cash due to increased customer demand, which helps cover operational costs, pay employees, and invest in growth. However, during the off-season, cash inflows decline, while fixed expenses such as rent, utilities, and salaries still need to be paid.
This imbalance can create financial strain if a business hasn’t properly planned for the downturn. For example, a beachside resort may generate most of its revenue in the summer but still need to cover maintenance and minimal staffing costs in the winter.
Managing Off-Peak Periods
If you know your business goes through seasonal down periods, it’s very important that you plan for them.
One key strategy is budgeting and saving during peak seasons to ensure there is enough cash flow to cover fixed expenses like rent, utilities, and minimal staff salaries during slower months. You can also consider opening a line of credit or pursuing other financing options in advance to manage shortfalls — without resorting to high-cost lending options like merchant cash advances. Another approach is negotiating flexible payment terms with suppliers or landlords, allowing for lower costs during off-peak months.
Additionally, you may want to explore diversifying your revenue streams to generate income year-round. For example, a ski resort could offer mountain biking and hiking activities in the summer, while a landscaping business might provide snow removal services in the winter. Seasonal promotions and discounts can also help attract customers during slower periods to avoid falling into a cash flow crunch that can lead to debt.
Some businesses use the off-season for planning and improvements, such as upgrading equipment, training employees, or enhancing marketing strategies for the upcoming peak season which can also challenge cash flow and lead to business debt.
Challenges of MCA Debt for Seasonal Businesses
Merchant cash advance debt can create several challenges for seasonal businesses due to its structure and high cost.
- Daily or weekly repayment schedule: MCAs require frequent payments, which can strain cash flow during off-peak seasons when revenue is lower.
- High costs: MCA fees are calculated using factor rates rather than traditional interest rates. This can not only translate to a very high effective APR, but because the entire fee is front loaded into the total repayment amount, you don’t save any money by paying off the debt ahead of schedule.
- Lack of flexibility in slow periods: Unlike traditional loans with structured payments, MCA repayments are tied to credit card sales or deducted as a fixed amount from business bank accounts. If revenue drops significantly in the off-season, the business may struggle to make their payments without seeking out additional financing.
- Stacking and debt cycle risks: Some seasonal businesses take on multiple MCAs (known as “stacking”) to cover shortfalls, leading to overlapping repayment obligations. The high-cost nature of MCAs makes it easy to fall into a never ending cycle of borrowing more to cover previous debts.
- Limited access to other financing: Because MCA debt and payment activity is not reported like traditional business loans, it doesn’t help build business credit. The high repayment obligations can also make it harder to qualify for traditional financing options that offer lower interest rates and more flexible terms.
Strategies for Managing MCA Debt
Managing MCA debt effectively is crucial for seasonal businesses to avoid cash flow crises and financial instability. Here are some key strategies for handling MCA debt, particularly for businesses with fluctuating revenue cycles.
Negotiate Flexible Repayment Terms
Although it’s not always possible, try negotiating with the MCA provider for more flexible payments. For example, some lenders may allow businesses to adjust payments during slow seasons, with the expectation that payments will increase along with demand during the peak season. However, this can be challenging and lead to breaching the contract with the MCA.
Improve Cash Flow Management
During peak seasons, set aside a portion of earnings into a cash reserve to cover MCA payments in slower months. Avoid taking new MCA during slow seasons to limit exposure to more MCA debt.
You can also cut non-essential expenses, renegotiate vendor contracts, or delay non-urgent investments to free up cash for repayments.
Consider MCA Consolidation or Refinancing
If your business qualifies, use a business line of credit to pay off the MCA and replace it with lower-cost debt.
You may also be eligible to refinance the MCA into a lower-interest SBA loan, business term loan, or another structured financing option. It’s not uncommon for an MCA broker to lure a business into new MCA debt by making promises of traditional or longer terms loans once an MCA is paid. This can lead to stacking or having multiple MCA’s that can eventually strangle a businesses cash flow.
Seek Professional Help
If you’re struggling to manage your MCA debt and falling behind on payments, you may need to hire a professional debt relief attorney to help you devise a solution to ongoing business debt.
An MCA attorney, for example, can help you with negotiating a settlement or navigating a lawsuit. If your MCA agreement includes a Confession of Judgment (COJ), consulting an attorney will allow you to explore options for protecting your business assets.
Legal and Financial Implications
MCA debt can present significant legal and financial implications, especially for businesses that struggle with repayment. Unlike traditional loans, MCA agreements are structured as future receivables purchases, which impacts how they are enforced and collected.
Confession of Judgment (COJ) Clauses
Many MCA agreements include a Confession of Judgment, which allows the lender to obtain a court judgment against the borrower without a lawsuit or defense. If a borrower defaults, the lender can immediately seize business assets, freeze bank accounts, or garnish revenues without prior notice.
However, some states (like New York) have restricted COJ enforcement due to abuses by predatory lenders.
2. Personal Guarantees
Many MCA agreements require a personal guarantee, meaning the business owner or someone in the business has signed to be personally responsible for repayment. If the business falls behind on payments or fails, the MCA lender can pursue the guarantor’s personal assets, such as bank accounts, real estate, or other assets.
3. Aggressive Debt Collection Practices
MCA lenders are not subject to federal lending laws like the Truth in Lending Act (TILA) or Fair Debt Collection Practices Act (FDCPA) because they structure their products as receivables purchases and are not consumer based loans.
Some debt collectors for MCA’s use harassment tactics, excessive phone calls, and legal threats to collect the MCA debt. It’s not uncommon to receive multiple threatening calls and texts about delinquent MCA debt.
If payments are missed, the MCA may force daily withdrawals, leading to overdrafts, frozen accounts, or additional penalties from UCC liens and debt collection tactics.
4. Potential for Legal Disputes
If a business tries to dispute the debt, MCA agreements often include arbitration clauses, limiting the business owner’s ability to take the MCA to court and are often State restrictive where the business is located is not the State where litigation can take place.
On the other hand, if your business defaults on the payments, the MCA provider can file a lawsuit which is common in MCA default cases. Here it is advisable to seek out a reputable attorney that works with MCA on a regular basis and is not soliciting for business. Reputable debt relief attorneys focusing on MCA debt can work with the MCA and protect the business from MCA debt collection lawsuits and harassment.
Tayne Law Can Help
Tayne Law Group has been helping clients find solutions to their consumer and business debt — including merchant cash advances — for more than 20 years. We offer a free, no-obligation phone consultation with an experienced business debt attorney who can offer you solutions to your business debt challenges. Call today at 866-890-7337 or fill out our short contact form. All conversations are confidential, and your information is never shared or sold.
