Is a Merchant Cash Advance Worth it When Your Business is Failing?

Business owners in distress often find themselves grasping for any solution to save their businesses. When it feels like your other options are exhausted, a merchant cash advance (MCA) may feel like the only solution.

MCAs, while effective in some rare situations, often make financial situations worse rather than better. Instead of turning to these financing tools, it’s often better to address the root cause of your business’s financial problems and talk to a business debt relief attorney who can help you explore your options.

Why Business Owners Consider an MCA When the Business Is Failing

When small businesses are failing, owners often turn to MCAs as a last resort, and it’s easy to see why. They offer fast funding (sometimes within 24 to 48 hours), minimal underwriting, and no collateral required. Even borrowers with weak credit histories can qualify, which often makes MCAs feel like the only option left once traditional lenders have said no.

Unfortunately, MCA providers understand the situation many merchants are in and use it to market their products. MCA brokers often appear at the worst moment, pitching speed and simplicity while being intentionally vague about the true cost.

Why a Merchant Cash Advance Usually Makes a Failing Business Worse

Many small business owners see MCAs as a saving grace, but they often make a failing business’s situation worse rather than better for several different reasons.

• High effective rates: MCAs have factor rates of 1.3 to 1.5, which translate to triple-digit annualized costs once your daily debits are factored in. The cost is many times what you would pay for a traditional business loan.
• Daily or weekly ACH debits: Frequent debits pull cash from your account at the exact time your business needs it the most, with no breathing room before the next payment.
• Personal guarantees and confessions of judgment (COJ): Personal guarantees put business owners personally on the hook for their business’s debts, while COJs allow funders to get default judgments without notice or trial.
• MCA stacking trap: When the first MCA starts hurting your business’s cash flow, funders often offer a second, then a third. This is known as MCA stacking. Each additional MCA is another payment and another step closer to insolvency.

Warning Signs You Should Not Take an MCA Right Now

Before signing an MCA agreement, it’s important to honestly assess your situation and see if any of these warning signs are present. If so, it might be a good idea to consult a business finance or debt professional who can help you explore your other options.

• You’re already missing financial obligations: If you’re falling behind on your payroll, rent, vendor payments, or tax obligations, another payment isn’t the answer.
• You have one or more MCAs already outstanding: Taking a second (or third) advance on top of an existing one comes with even more fees and another daily or weekly debit.
• Your revenue is in a sustained decline: An MCA might make sense for a temporary dip with a clear recovery plan, but it rarely makes sense for a sustained decline in sales.
• The broker sells you on funding speed: If the MCA provider or broker is focusing on the funding speed rather than how the payments fit into your cash flow, walk away.

Smarter Options When Your Business Is in Cash Flow Crisis

There are almost always better options than taking on MCAs to help your struggling business. They may require a bit more work and time upfront, but can ultimately help preserve more of your business and personal assets.

Here are some alternatives to explore:

• Negotiate with existing creditors: Vendors, landlords, and the IRS might prefer structured payment arrangements to you defaulting on your debt. Creditors are often willing to negotiate hardship arrangements if you contact them early.
• Review your existing MCA agreement: Many MCA contracts include reconciliation clauses that can help you reduce your debits when your business revenue declines.
• Talk to a business debt attorney: An MCA attorney can help you with restructuring, settling existing debt, or fighting against existing predatory agreements.
• Consider a structured wind-down: If business closure is inevitable, it might be better to do a structured wind-down that protects your personal assets instead of borrowing more money to temporarily delay business closure.

How Tayne Law Group Helps Business Owners Before They Sign Another MCA

Tayne Law Group represents business owners across the country in MCA defense, contract review, and debt resolution. Whether you’re considering a new advance, struggling with your existing MCA obligations, or facing aggressive collection tactics from an MCA company, our firm can bring specific experience with the legal and financial complexity these situations require.

When it comes to seeking legal help for your failing business, the most important thing is to start early. The earlier you get legal counsel involved, the more options you’ll have. Waiting until you’ve already taken out one or more MCAs or have already missed payments makes for a more difficult road to financial recovery.

To learn about financial options to help your business or deal with a burdensome MCA, contact us today by calling (866) 890-7337 or filling out our short contact form to schedule a free phone consultation. We never share or sell your information, and all conversations are confidential.

Frequently Asked Questions

Is it ever a good idea to take out an MCA when my business is struggling?

An MCA could be helpful for a struggling business if there’s a short-term revenue gap with a clear road to recovery. But in most cases, an MCA isn’t the right answer, and often ends up doing more harm than good in helping your business recover.

What happens if I take out an MCA and my business still fails?

If you take out an MCA and your business fails, the MCA funder will still expect to be paid back. Most MCA agreements include personal guarantees, so if your business fails and can’t repay the MCA, the funder will come after you personally to pay it. You could face legal action and consequences such as wage garnishment, bank account freezes, or liens. 

Can I be held personally liable for a merchant cash advance if my business closes?

Yes, because MCAs often include personal guarantees, you can be held personally liable for the debt. The MCA provider could come after personal assets like your home equity, personal bank accounts, and future wages, even after the business has closed its doors. An attorney can review your contract to determine what, if any, personal liability you have.

Are there alternatives to a merchant cash advance when I have bad credit and need cash fast?

If your business is struggling but you have bad credit, an MCA isn’t necessarily your only option. Other financing options to consider include invoice factoring, business lines of credit, or SBA loans. These options will be more affordable than MCAs, and often have more flexible repayment schedules. You can also consider negotiating with your existing vendors and creditors rather than borrowing money to meet those obligations.

Should I talk to an attorney before taking out a merchant cash advance?

Yes, especially if your business is already under financial stress. An attorney can review your MCA agreement before you sign and flag problematic clauses, including personal guarantees, vague reconciliation terms, and confessions of judgment. The attorney can also assess your situation and determine if there’s a better alternative that fits.