Many business owners turn to merchant cash advances (MCAs) as a way to get fast cash. And it’s true that MCAs are more accessible than other types of business loans — they often have lower or no credit score requirements and may not require as much time in business. But they also come with serious risks, and they can be difficult to repay.
MCAs are advances on your business’s future cash flow. You borrow a lump sum, and then repay it in daily or weekly payments based on a percentage of your revenue or credit card sales. But between the frequent payments and high fees (known as the factor rate), it can quickly feel overwhelming.
Unfortunately, stopping your payments will cause you to go into default on your MCA and could result in your lender taking legal action against you. If you have an MCA for your business and are struggling to repay it, it’s important to understand how to stop your payments without going into default or facing legal consequences.
Reasons to Stop MCA Withdrawals
If you’ve borrowed a merchant cash advance before, you likely know how quickly the payments can become overwhelming.
MCAs charge a fee known as a factor rate, which often ranges from 1.1 to 1.5. This increases the cost significantly. Now, combine that with the frequency of MCA payments — most require either daily or weekly payments. These payments are automatically withdrawn from your bank account, usually as a percentage of your revenue. When your revenue increases, so do your MCA payments. And when your revenue decreases, you have less money overall to cover your debts and other business expenses.
A business owner may want to stop their MCA payments due to cash flow restraints. The frequent payments can make it seem like your money leaves your business’s bank account as soon as it comes in. This can have a negative impact on your overall operations since you have less money to devote to other expenses, whether it be inventory, employee wages, or even growing your business.
Finally, someone may want to stop their MCA withdrawals to explore better financing solutions. There are alternatives to MCAs, and stopping your payments can give you the breathing room you need to find a loan that better fits your business’s needs.
Practical Steps to Halt Merchant Cash Advance Withdrawals
If you feel like you’re in over your head with your MCA, you still have some options. Here are some practical steps to take to stop your MCA withdrawals.
Contact Your MCA Provider to Negotiate
First things first, contact your MCA provider to see if they can work with you on something called a reconciliation. Some business debt lenders offer hardship relief to business owners in need.
You can ask that they temporarily reduce your payments or extend your payment schedule. You’ll still have to make payments on your MCA, but the lower payments can improve your business’s cash flow and make it easier to catch up on your debt repayment and other obligations.
In a dire situation, you may even be able to negotiate a settlement with your MCA provider, meaning you’ll repay less than you actually owe. You can try to negotiate a settlement with your MCA provider on your own, but it may be more successful if you work with an MCA debt help attorney.
Refinance Your MCA
Another way to stop your MCA payments is to refinance. When you refinance an MCA, you typically take out a traditional business loan, one with a fixed term and interest rate. You’ll then use that loan to pay off your MCA.
While you’ll still owe just as much money — plus the interest on your loan — it will likely be easier to repay. The fixed payments will provide more stability in your budget, while the lower interest rate and monthly payments will give your cash flow some relief.
If you’re considering refinancing your MCA, make sure to shop around with multiple lenders to get the best rates and terms. Many lenders allow you to get pre-approved on their website, which allows you to easily compare your options.
Reevaluate Your Business Banking Setup
If you’re unable to negotiate or refinance your MCA right away but you need some relief, consider changing your business banking setup and safeguard your accounts from unauthorized withdrawals, especially if your MCA provider is withdrawing more than you believe they should be.
The reason you might consider this is that the MCA company will automatically withdraw your payments from your bank account. But keep in mind that if you move your business bank account and don’t set up new withdrawals with your MCA provider, you could go into default. It’s best to work with your MCA provider directly or refinance the loan.
Bankruptcy: A Last Resort Option
If you’ve exhausted your options and don’t have another way to get out of your MCA debt, then bankruptcy may be your best option. Chapter 11 bankruptcy allows for the reorganization of a business. You’ll be able to restructure your debt, and you’ll continue to make payments on it under a new payment plan.
Whether an MCA is included in your Chapter 11 bankruptcy depends on how the court interprets the debt. If the court sees the MCA as a sale of future receivables, you may not be able to restructure it under the bankruptcy. But if the court considers your MCA to be a loan, it can be restructured.
Keep in mind that bankruptcy isn’t a get-out-of-jail-free card. You’ll still have to make payments on your debt. Additionally, the bankruptcy will appear on your business credit report and can have a negative impact on your credit, making it difficult (if not impossible) to qualify for new business credit, at least temporarily. Make sure to exhaust your other options before exploring bankruptcy as a solution.
Preventing Default Proactively
While there are solutions to help you with your MCA debt if it becomes too overwhelming, it’s best to be proactive about your debt. Take steps at the first sign of trouble to avoid going into default and being sued by your MCA lender.
First, make sure to keep the lines of communication open with your MCA lender. The company may be willing to work with you on a solution. It’s in their best interest to do so since it will help ensure they get their money back. But if you don’t communicate with them and simply stop making payments, you’re likely to end up with a negative outcome.
Next, consider what steps you can take in your business to avoid default on your MCA. Develop and maintain a financial strategy for your business that leaves room for both debt repayment and your other financial obligations. And if necessary, consider what other revenue streams you can bring into your business that would ease your cash flow worries.
Legal and Professional Guidance
If you’re worried about MCA default or have already defaulted on your debt, consider enlisting the help of a merchant cash advance attorney. MCA debt attorneys have experience dealing with these business lending tools and can help craft a plan to deal with your debt.
An MCA debt help attorney is especially helpful if you’re unable to repay the loan. Your business attorney will understand and can advise you on your rights. Additionally, a good debt relief attorney can negotiate directly with your business lenders or MCA’s on your behalf. Finally, if a settlement isn’t possible and the lender pursues legal action, an experienced business debt attorney can represent you in court and argue your case.
Tayne Law Group has more than two decades of experience helping borrowers and business owners like you. If you’re struggling with your MCA, we may be able to help, whether you’re looking for advice on restructuring your debt, need help negotiating a settlement, or are facing legal action from your lender.
To learn more, call us at (866) 890-7337 or fill out our short contact form to speak with someone on our team – the call is free. We’ll never sell or share your information, and all conversations are confidential.
