Merchant cash advances (MCAs) can provide quick capital for your business for anything from short-term expenses to long-term business growth if you can’t access traditional financing. But MCAs can quickly spiral out of control, especially if you’re stacking more than one at a time.
If you’re considering using an MCA for your business, it’s important to understand how to best navigate them. This guide will break down the risks of stacking them, how many MCAs are “too many”, some alternatives to consider, and what to do if you’re in over your head with your current MCAs.
What Is MCA Stacking?
MCA stacking involves taking out multiple merchant cash advances at the same time or close together. Each MCA requires making daily or weekly payments as a percentage of your receivables, which can place a strain on your business’s cash flow.
How Merchant Cash Advances Work
A merchant cash advance (MCA, for short) is an alternative type of business financing that allows you to borrow against your business’s future sales. You’ll get a lump sum from the MCA company, and then you’ll make frequent payments (often daily or weekly) as a percentage of your credit card sales or receivables, known as the holdback rate.
Each MCA also has a fee known as the factor rate, which usually ranges from 1.1 to 1.5. For example, if you got a $50,000 MCA with a factor rate of 1.5, you would pay a total of $75,000 — $50,000 to repay the borrowed funds, and the remaining $25,000 in fees.
As a percentage, fees on MCAs are considerably higher than the fees and interest on traditional business loans. And because of the way MCA fees are calculated, there’s no benefit to paying them off early, as there is with traditional installment loans.
Finally, most MCAs include a Confession of Judgment (COJ) clause. This part of your MCA agreement states that if you don’t repay your MCA, you waive your right to defend yourself in court, and can have an automatic judgment issued against you.
Why Business Owners Take Multiple MCAs
Businesses often turn to MCAs because of their fast funding and lenient eligibility requirements. Here are some situations in which a business owner might stack MCAs:
- Urgent cash needs: MCAs often have faster funding than traditional business lending, so business owners may turn to them when facing a financial emergency or if they need quick cash.
- Easy access to funds: MCAs are often easier to qualify for, making them attractive to borrowers who don’t meet the credit and/or collateral requirements to get a loan from a traditional bank or credit union.
- Flexible repayment: MCA payments are tied to business revenue, so business owners may get peace of mind knowing that if their credit card sales decline, so will their required payment.
How Many Merchant Cash Advances Is Too Many?
There’s no cut-and-dry limit for how many cash advances are too many. One business may be able to comfortably handle multiple MCAs, while another feels too big a strain on its cash flow from just one. It also depends on the specific terms of the MCA, including the principal balance, factor rate, and repayment term.
Warning Signs You’ve Reached the Limit
We can’t tell you exactly how many MCAs are too many, but we can lay out some general warning signs that you’ve taken out more MCAs than your business can reasonably handle:
- Your daily or weekly payments exceed your profit margins.
- You’re using one MCA to pay off another.
- You’re paying your vendors or employees late because of your MCA payments.
More than one MCA (and sometimes just one) can create risk in your business. The true number of MCAs that’s “too many” depends on your cash flow, revenue, and MCA terms.
The Risks of Stacking Too Many MCAs
Stacking too many MCAs can mean serious trouble for your business, from a strained cash flow to the risk of legal action. Here are some risks to be aware of:
- Cash flow drain: MCAs require frequent payments, often either daily or weekly. Money coming out of your bank account so frequently can put a strain on your cash flow, making it difficult to cover your other obligations.
- High costs: The high fees on MCAs make them significantly more expensive than traditional business loans. You could be paying up to 50% of your loan amount in fees.
- Risk of default and legal action: With too many MCAs, they could be difficult to repay, increasing your risk of defaulting on one or more. MCA providers are often aggressive about taking legal action on defaulted accounts.
- Contract violations: Many MCA agreements specifically prohibit stacking, which could put you in breach of your contract.
- Confessions of Judgment (COJ): Defaulting on your MCA or violating your contract in any other way could trigger the COJ clause, resulting in a legal judgment against you.
Alternatives to Taking on More MCAs
While it may sometimes feel like taking on more MCAs is the only option, these are some alternatives you should consider before going down that road.
- Debt consolidation or refinancing: Consider whether you can consolidate or refinance your current MCA(s) to make your payments fixed and more affordable. This can help free up cash flow in your business.
- Negotiating your MCA terms: Some MCA providers will negotiate your terms to make repayment easier. You may be able to lengthen the payment term or lower your daily or weekly payments to make your MCA more affordable.
- Traditional business financing: Before applying for another MCA, consider more traditional business financing options, such as installment loans or lines of credit, which can be more affordable. If necessary, work to improve your credit score before applying.
- Seek legal advice: If you’re truly out of options, consider speaking with an MCA attorney who can look at your situation, advise you on your MCA contract, and help protect your business from predatory providers.
How a Law Firm Can Help with MCA Debt
If you’re struggling to manage your MCA debt, no matter how many MCAs you have, consider speaking with an attorney. An experienced MCA attorney can help you in the following ways:
- Review legal contracts: An MCA attorney can review your current MCA contracts, as well as advise you on any new MCAs you’re considering.
- Defend you against collections or lawsuits: MCA providers are known for aggressive collection tactics and can be quick to sue. An MCA attorney can defend you.
- Negotiate your debt: An MCA attorney can negotiate with your MCA providers to either settle or restructure your debt.
- Help with long-term stability: An MCA attorney can help you establish long-term business stability strategies to avoid future financial troubles.
Conclusion
Despite their risks, many businesses find they’re able to manage just one MCA. However, stacking multiple advances can create a debt spiral that’s difficult to climb out of.
There’s not necessarily a set number of MCAs that’s too many. Instead, it depends on each individual business, their financials, and the terms of each MCA. However, if they’re causing financial problems for your business, there’s a good chance you’ve taken on too much.
If you’re wondering whether you’ve taken on too many MCAs, consider seeking professional guidance from an MCA attorney experienced with these matters.
Tayne Law Group’s attorneys work with business owners managing merchant cash advances, whether they’re just considering them, are struggling to repay their debt, or are facing UCC liens and other MCA legal battles on a daily basis.
To learn more about how Tayne Law Group can help you with business and other debt relief, contact our law offices now by calling (866) 890-7337 or filling out our short contact form. We never share or sell your information, and all conversations are confidential.
