Quick Summary
A merchant cash advance isn’t a bank loan. Instead, it’s a purchase of your future sales. That difference matters more than most business owners realize. An MCA can quickly drain your business’s cash flow through daily debits and fees that add up to effective interest rates in the triple digits. If you’re struggling with MCA debt, understanding how it works is the first step toward finding a solution.
What Is MCA Debt and How Does It Work?
A merchant cash advance (MCA) is a purchase of your business’s future credit card sales or receivables rather than a business loan. The MCA company gives you money now in exchange for a portion of your future revenue.
MCAs don’t charge interest the way traditional small business loans do. Instead, they use a factor rate, which often ranges from 1.3 to 1.5. You multiply your factor rate by your loan amount to determine the total amount you’ll repay. For example, if you have a $50,000 MCA with a factor rate of 1.5, you’ll pay back $75,000.
MCAs are usually repaid through either daily or weekly debits. The MCA funder withdraws funds directly from your bank account. The constant drain on accounts catches many business owners off guard and puts them in a tough position.
MCAs are usually designed to be repaid within anywhere from just a few months to 18 months, which results in high costs. For example, if you’re paying back that $75,000 we talked about over 12 months, you’ll pay more than $288 per day.
Why MCA Debt Hits Harder Than Traditional Loans
The structure of MCAs creates challenges that make them particularly difficult to repay. First, unlike with traditional business loans, the costs aren’t clear. A factor rate is intentionally vague, and doesn’t tell you that you may end up paying more than 100% in interest.
Additionally, the daily or weekly payments create problems for your working capital. Even when you’re having a slow business week, there’s still money leaving your account. These challenges become even more pronounced if you take out multiple MCAs (known as MCA stacking).
There are also legal issues with MCAs. First, there are few regulatory protections like there are with traditional loans. Because MCAs are structured as commercial transactions, usury laws and consumer based regulations often don’t apply.
Finally, many MCAs include confession of judgment (COJ) clauses. These allow your MCA provider to get a court judgment against you without a trial if you fall behind on your payments. You could end up having your bank accounts frozen without warning.
How MCA Debt Impacts Your Business
If you have an MCA, you may already be feeling the various ways one can affect your business. Here are just a few of the ways MCA debt can impact small businesses:
- Payroll stress: When your daily debits hit, you may find yourself short on payday, having to either delay employee paychecks or scramble to cover payroll.
- Inventory and supplies: With more money coming out of your account for your MCA, you’ll have less available to purchase needed inventory and supplies.
- Growth on hold: It’s difficult to grow your business when so much of your business’s revenue is going toward your MCA payments.
- Vendor relationships: Cash flow issues could result in late payments that strain your relationships with your vendors and suppliers.
- Banking problems: Regular overdrafts and low balances can hurt your relationship with your bank, possibly even resulting in closed accounts.
- Personal liability: If your MCA includes a personal guarantee, your personal assets could be at risk if your business can’t make the payments.
Warning Signs Your MCA Debt Is Unsustainable
If you’re struggling with your MCA debt, it’s important to do an honest assessment to determine if the situation has gone too far. Here are some red flags that your financial situation is unsustainable, and it might be time to ask for help:
- You’ve taken out a new MCA to pay off an existing one.
- You regularly overdraft your bank account because of MAC debits.
- You’re falling behind on payroll, rent, or essential bills.
- You’re receiving collection calls or legal threats from MCA companies.
- You’re feeling like you’re working just to pay back advances, not grow your business.
If any of these sound familiar, it’s time to explore your other options. The sooner you act, the more options you’ll have.
Options for Getting Out of MCA Debt
Even if your MCA situation feels hopeless, know that you have some options:
- Negotiate with your MCA lender: Some funders will agree to reduce your daily payments or extend your payment terms if you communicate proactively. This option works best before you’ve missed any payments and is usually just short term.
- Review your contract for problems: MCA funders sometimes include illegal or unenforceable terms. An experienced MCA attorney can identify issues, including overly broad COJ clauses, undisclosed fees, or terms that violate state law.
- Challenge aggressive collection tactics: If your MCA funder has taken legal action against you or had your bank accounts frozen, or sent UCC liens you may have legal defenses. Maybe companies cut corners on proper legal procedures, leaving the door open for challenges.
- Settle for less than you owe: Many MCA companies would prefer a reduced payment over either expense, drawn-out litigation, or no payment at all. An experienced MCA attorney can often get you better debt settlement terms than you would get on your own.
- Explore MCA restructuring options: Other restructuring options, including bankruptcy, might make sense as a last resort if you can’t manage the MCA payments anymore.
While you’re exploring your MCA relief options, there are also some steps you should avoid, such as ignoring your MCA debt, taking on more MCAs to pay off your existing ones, or working with debt relief companies that charge large upfront fees without clear explanations of their services.
Take the First Step Toward Relief
MCA debt can feel overwhelming, but there are plenty of options to help you address it. The important thing is acting before things get worse, from lawsuits to frozen accounts, which could force you into decisions you may regret.
Tayne Law Group helps l business owners understand their MCA debt and find realistic paths forward to avoid costly liens and litigation and save the business from going under as a result of the MCA payments. We have decades of experience dealing with MCA lenders, and we know how to negotiate with funders, challenge unfair contract terms, and protect your business.
If you need help managing your MCA debt, Tayne Law Group can help. We can review your situation and explain your options in plain English with no pressure or judgment. Contact us today by calling (866) 890-7337 or filling out our short contact form to set up a free phone consultation. We never share or sell your information, and all conversations are confidential.
FAQ
What’s the difference between a factor rate and an interest rate?
An interest rate represents the percentage of your loan amount you’ll pay each year in interest. Meanwhile, a factor rate on an MCA is a multiplier that determines your total repayment amount. You can usually lower your interest payments on a loan by paying it off early, but you’ll pay the full factor rate no matter how quickly you pay off your MCA.
Can I just stop paying my MCA?
Stopping payments on your MCA could have major negative consequences. MCA contracts can use aggressive collection tactics, confession of judgment clauses and UCC clients that allow companies to get monies from you without going to trial. You could face consequences like lawsuits, frozen bank accounts, and seized business assets. And because of personal guarantees, your personal assets could be at risk.
Is MCA debt considered a loan for bankruptcy purposes?
While MCA funders don’t consider their financing to be loans, bankruptcy courts don’t always agree. When you file for bankruptcy, the court will examine the actual nature of the transaction to determine if it’s a loan. In some cases (though not all), MCA can be discharged during bankruptcy.
Can an attorney really help with MCA debt?
Yes, an experienced MCA attorney can help you explore several different options, including restructuring your debt, negotiating a settlement, or exploring your various defense options. Working with the right attorney can make all of the difference in getting the right terms and being protected.
