Can You Refinance a Merchant Cash Advance?

Merchant cash advances have become a popular way for small business owners to get financing. However, due to the high costs and daily payment schedule, MCA recipients may quickly find that their advance is placing a major strain on their business finances. One potential solution to that problem is to refinance a merchant cash advance. 

It is possible to refinance a merchant cash advance, though it’s important to consider the specifics of your situation and the terms available. Refinancing an MCA involves taking out a new loan or advance to pay off the existing MCA, ideally under more favorable terms for the borrower. This can be an attractive option for businesses looking to lower their payment amounts, extend their repayment term, or improve their overall financial situation. However, there are several factors to consider. Here’s what you should know about refinancing an MCA.

The Problem With Merchant Cash Advances

Every MCA works a bit differently, including the length of the repayment period, the payment structure, and the costs. In general, however, MCAs share a few common characteristics.

For one, they come with short repayment terms — usually no longer than two years. They also require that payments be deducted daily (or sometimes, weekly). And the costs can be steep; MCA providers charge a factor rate that’s typically between 1.1 and 1.5. 

Business owners that take on merchant cash advances tend to run into a couple of problems. First, the sheer cost of the advance can put a strain on their finances. For example, a $100,000 advance with a factor rate of 1.3 would cost $30,000 in fees. 

Unfortunately, some MCA recipients try to solve their cash flow issues by getting another MCA. This is referred to as “stacking.” It can result in a cycle of debt where the business owner is never able to pay off the advances, and end up digging themselves deeper into debt. 

What Is Refinancing?

Refinancing involves replacing an existing credit agreement with a new one (typically, a loan). The goal is to make favorable changes to the agreement, such as a lower interest rate, longer or shorter repayment period, or other terms outlined in the contract. 

This is similar to debt consolidation, which is when you combine several debts into one, often with more favorable terms.

Refinancing vs. Consolidation

Refinancing an MCA involves taking out a new loan or financial product to pay off the existing MCA. The primary goal here is to secure more favorable terms than the current advance, such as a lower interest rate, lower daily or weekly payments, or a longer repayment term. Refinancing can help businesses manage their cash flow better and reduce the financial strain of high MCA repayment rates. The new financing replaces the old MCA, and the business then makes payments to the new lender under the agreed terms.

Consolidation involves taking out a new loan or financial product to pay off multiple MCAs or debts. The goal of consolidation is to simplify the debt repayment process by combining several debts into one, ideally with more favorable terms than the existing advances. This can be particularly helpful for businesses that have taken out multiple MCAs and are struggling with the complexity and burden of managing several different repayment schedules and terms.

Can You Refinance a Merchant Cash Advance?

The short answer: yes. But it’s important to go about it the right way. Let’s take a look at your options for refinancing an MCA and which is best.

Refinancing Options: MCA vs. Loan

One of the biggest mistakes you can make is refinancing a merchant cash advance with another one. That’s true even if the payments are lower. 

Why? Merchant cash advances don’t work like traditional business loans (in fact, they aren’t loans at all). And unlike business loans, cash advances don’t amortize. 

Here’s what that means: When you make payments on a typical loan, interest and principal are tracked separately through a process called amortization. When you pay off your principal early, you actually save money by paying less interest overall.

With a merchant cash advance, on the other hand, the principal and interest (AKA your factor rate) are lumped together and split up equally across payments. For example, say you take out an advance of $100,000 with a factor rate of 1.3. The total cost of your MCA is $130,000, and you must pay that full amount to close the account. There are no savings for paying it off early. 

Using another MCA to pay off your current one not only means taking on another expensive, non-amortized debt. A chunk of the new MCA will go toward paying off the interest on your original one, which means you end up paying interest on interest.

Merchant Cash Advance Refinancing Options

• Term Loan: A traditional bank loan typically has much lower interest rates, a fixed monthly payment, and a repayment term of around three to five years. The catch is that there are more stringent eligibility requirements. You’ll have to show that you’ve been in business for a while, you have good credit, and are cash flow positive. The lender will likely require you to provide tax returns, bank statements, profit and loss statements, and more to prove you can afford the loan.
• SBA Loan: The U.S. Small Business Administration (SBA) offers several loan programs that can be used for refinancing debt, including MCAs. SBA loans are known for their competitive terms and rates, longer repayment periods, and lower down payments. However, they have stringent eligibility requirements, including strong credit scores and solid business financials, and the application process can be lengthy.
• Alternative Lenders: Alternative lenders (online lenders, fintech companies) often offer a range of financial products, including loans and lines of credit, with less stringent qualification criteria than traditional banks. They can be a good option for businesses that need to refinance quickly or that do not qualify for bank loans. However, their rates can be higher than those of banks or the SBA.
• Asset-Based Lending: For businesses with significant assets like real estate, inventory, or equipment, asset-based lending can provide a way to refinance an MCA. Loans are secured by the assets, which can sometimes result in lower interest rates, but risking the asset if the loan is not repaid.

Should I Refinance a Merchant Cash Advance?

You understand that you can refinance or modify a merchant cash advance. The important question now is should you ?

In general, you can probably benefit from refinancing an MCA if the payments are currently causing a cash flow crunch, you can qualify for a loan with better terms, and the cost of refinancing doesn’t outweigh the savings. 

It also helps to weigh the pros and cons when deciding whether to refinance an MCA or pursue other financing options that make sense for your business:

Pros:

• Monthly installments: An MCA requires that payments be deducted daily or weekly from your business bank account. This can strain cash flow and make it difficult to meet your daily business obligations. With a business loan you only need to make one payment per month.
• Fixed payments: MCA payments fluctuate depending on your revenue. If you bring in a lot of money one day, your payment could increase. And if you don’t make as much another day, your payment is smaller. With a bank loan, your payment is the same amount every month, so you know what to expect and can budget accordingly. 
• Longer repayment period: You don’t get much time to pay back a merchant cash advance. Typically, it’s only 4-24 months. On the other hand, a traditional installment loan comes with a longer term of around 2-5 years.

Cons:

• Closing costs: Even though taking out an installment loan is much cheaper than an MCA, you still need to pay closing costs. This is cash that needs to be paid upfront, or rolled into the loan. 
• Requires a credit check: To qualify for a loan from a traditional lender, you generally need to have good credit. The application process will include a credit check of both your business credit and your personal credit. This means your credit can temporarily drop by a few points. 
• May need collateral: Depending on the health of your credit and overall finances, the lender may also require you to put up collateral (such as inventory, real estate, etc.) in order to qualify for a traditional business loan. If you fail to repay the loan according to the terms, the lender can seize these assets (and potentially start litigation against you and your business).

Merchant Cash Advance Alternatives

When considering alternatives to an MCA, it’s important to explore options that might offer more favorable terms, lower interest rates, or better align with your business’s financial strategy and cash flow management. In addition to the refinancing options mentioned above, here are some common alternatives to MCAs:

• Business lines of credit: A line of credit offers flexible access to funds up to a certain limit. You only pay interest on the amount you draw, not the entire credit line, making it a versatile option for managing cash flow.
• Invoice financing/factoring: Invoice financing allows businesses to borrow money against the amounts due from customers, providing immediate cash flow. Invoice factoring involves selling your invoices to a factoring company at a discount, in exchange for immediate cash.
• Equipment financing: Specifically designed for purchasing business equipment, these loans use the equipment itself as collateral, potentially offering lower rates than unsecured financing options like MCAs.
• Peer-to-peer lending: Online platforms connect businesses with individual investors willing to lend money. Interest rates can vary, but they may be more favorable than those of MCAs, depending on your credit profile.
• Venture capital/angel investment: For businesses with high growth potential, equity financing through venture capital or angel investors can provide significant capital in exchange for ownership stakes. This is more common for startups and tech companies.

Each of these options has its pros and cons, and the best choice depends on your business’s specific needs, financial health, and long-term goals. For example, businesses with strong credit profiles might find term loans or SBA loans advantageous, while those with uneven cash flow might benefit from a line of credit or invoice financing. It’s important to carefully assess your situation and possibly consult with a financial advisor or attorney to determine the most appropriate financing option.

Get Help With MCA Debt

A merchant cash advance can turn into a major burden for your business. If you’re struggling with MCA debt payments, it’s important to review your rights and legal options. Failing to repay an MCA according to the terms can be considered a breach of contract, and MCA funders may pursue legal action. That can include filing a lawsuit. Plus, they may harass you and your clients, as well as file a UCC lien against your business income. 

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 attorney who can offer you solutions to your business debt challenges. Call today and learn about how we may be able to help. Your call is never outsourced to a third-party call center, and your information is never shared or sold. Call today at 866-890-7337 or fill out our short contact form. All conversations are confidential.

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