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How to Negotiate with a Merchant Cash Advance Lender

negotiate merchant cash advance

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merchant cash advance (MCA) is a form of short-term business financing where a company receives a lump-sum amount of capital upfront in exchange for a percentage of its daily or weekly credit card sales, plus a fee. If you’re searching for financing for your small business, you may have encountered MCAs. And you might be wondering if it’s possible to negotiate merchant cash advance contracts. 

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It may be possible to negotiate certain terms of an MCA, although the extent to which you can will vary depending on several factors. That includes the MCA provider’s policies, your business’s financial health, your sales history, etc.

MCA agreements can be tricky and leave your business in a worse position if you aren’t careful. But if you’re going to pursue one, here’s what you should know to negotiate merchant cash advance fees and terms.

Key Parties in an MCA Agreement

In general, three parties are involved in an MCA contract. Understanding everyone’s roles can help your negotiations.

1. Merchant/Seller

The merchant is the business owner or seller that receives the funds. They are responsible for repaying the advance according to the contract terms.

Responsibilities:

  • Ensure that the business generates enough receivables to repay the advance.
  • Maintain open communication with the MCA provider.
  • Understand the terms of the agreement, including repayment amounts, frequency, and associated fees.

2. MCA Funder/Purchaser

The provider of the MCA is the financial institution or entity that provides the capital to the merchant in exchange for a share of future sales with a fee.

Responsibilities:

  • Assess the credit risk and revenue-generating potential of the business.
  • Offer an MCA agreement to purchase future monies from the merchant/seller, including the advance amount, repayment percentage, and any associated fees.
  • Monitor the business’s merchant account, including accounts receivable and bank accounts, to take the agreed-upon percentage of sales for repayment.

3. Payment Processor

The payment processor is the intermediary between the seller and the MCA purchaser in handling credit card transactions or other payment processing methods where the business receives customer funds. Sometimes, the MCA purchaser may require the merchant to switch to a specified payment processor.

Responsibilities:

  • Process credit card transactions, payment, and debit card sales for the business.
  • Facilitate the withdrawal of the agreed-upon percentage of daily or weekly sales to repay the MCA provider.

Understanding the Cost of an MCA

It’s important to understand the associated costs before entering into an agreement. Here are some of the costs you’ll encounter.

Factor Rate

Unlike traditional loans with an interest rate, merchant cash advance companies use a factor rate to determine the total repayment amount. The factor rate is typically expressed as a decimal, ranging between 1.1 and 1.5

The factor rate tells you the total amount you’ll need to repay. For instance, if you receive a $10,000 advance with a factor rate of 1.4, you will need to repay $14,000 (the $10,000 advance plus $4,000 in fees).

Retrieval Rate or Holdback Percentage

This is the percentage of your daily or weekly credit card sales that will be withheld by the MCA provider for repayment, which typically ranges anywhere from 5% to 20%. A high rate could severely impact your cash flow, especially during low sales periods.

Other Potential Fees

There may be a host of other fees associated with an MCA. Some common examples include: 

  • Origination Fees: Some MCA providers charge an upfront fee to process the cash advance. This cost is either deducted from the advance amount or added to the total repayment amount.
  • Administrative Fees: These are fees for managing the MCA, including payment processing, account maintenance, and other back-office tasks. These are generally added to the cost of the advance and can accumulate over time.
  • Late Fees/Penalties: You may be charged late fees or other penalties if you cannot meet the agreed-upon repayment terms.
  • Broker Fees: If you’re using a broker or third-party service to find an MCA provider, they may charge a fee. This can be a flat fee or a percentage of the advance amount.

What Can be Negotiated?

In general, merchant cash advance providers offer little room for negotiation. The terms of your contract are influenced by many factors, such as your business’s sales records, projected revenue, years in business, type of business, and more. Ultimately, things like your factor rate, holdback rate, and repayment term are set by the MCA company and are not negotiable. 

That said, you may secure more favorable terms by reducing the risk for the MCA company. For example, if you pledge collateral (such as business equipment or inventory) in addition to your future receivables, the MCA provider may agree to a lower factor rate. 

Additionally, if your MCA payments negatively impact your business, you may be able to work with the MCA funder to restructure your agreement. This process is known as MCA reconciliation

Most MCA contracts come with a mandatory reconciliation clause. This essentially says that if your company loses revenue and your MCA payments become unmanageable to the point that your business is severely challenged or in danger of failing, the MCA provider must offer to restructure the advance so you can meet its terms for payments. 

You’ll need to let the MCA company know right away if you want to reconcile the agreement. And you should be prepared to provide documentation of your decline in receivables. The MCA provider should then work with you to lower the payment until your revenue meets its original target. 

If the MCA company refuses to reconcile your advance, they could be considered in breach of contract, and the advance may be considered usurous. To find out if your MCA contract allows for reconciliation and determine the best way to negotiate revised payment terms, working with an attorney with experience handling MCA agreements is a good idea.

Dos and Don’ts of MCA Contract Management

Understanding an MCA contract can be crucial for your business’s financial health. While MCAs provide quick access to capital, they can be costly if not managed properly. Here are some dos and don’ts to consider when you’re evaluating offers and choosing an MCA agreement:

Dos:

  • Do your research. Understand the current market for factor rates, holdback rates, and any associated fees. The more you know, the better you’ll be able to negotiate.
  • Do understand your financial situation. Know your daily and monthly revenues, profit margins, and operating expenses. This will help you choose a repayment schedule that aligns with your cash flow.
  • Do be transparent and honest. Clearly articulate your business needs, how you plan to use the funds, and what repayment terms you can realistically meet.
  • Do review multiple offers. Don’t go with the first offer you receive. Review offers from different providers, so you know what’s available to you.
  • Do rely on experts. Consult financial advisors or legal experts to help review and understand the contract terms.
  • Do document everything. Ensure the contract documents any agreed-upon terms, concessions, or verbal promises.
  • Do assess the total cost. Understand not just the immediate value of the advance but the total cost you will have to repay, including all fees.
  • Do plan for contingencies. Discuss what happens in case of early repayment, late payments, or if you want to renegotiate terms midway.

Don’ts:

  • Don’t act out of desperation. Even if you need cash quickly, keep your cool. You don’t want to agree to something you don’t understand or can’t afford.
  • Don’t gloss over the fine print. Always read the entire contract, including the fine print. Ignorance is not an excuse in legal agreements.
  • Don’t accept verbal promises. Ensure all aspects of the agreement are in writing. Verbal agreements can be difficult to enforce.
  • Don’t ignore fees. Administrative fees, origination fees, and potential penalties can add up. Make sure you know about all possible costs.
  • Don’t forget to consider alternatives: MCAs are just one form of business financing, and they’re often the most expensive. Explore other options with lower interest rates, such as business term loans, lines of credit, or even crowdfunding, which may be better for your business in the long run.
  • Don’t be afraid to walk away: If you can’t find an MCA with terms that are favorable and fair, be prepared to walk away and look for other financing options.

Do You Need a Merchant Cash Advance Attorney?

You might be tempted to save money and handle MCA debt negotiations on your own. Or you might be solicited by a third-party. However, this could be setting yourself up for failure. Merchant cash advances are complex agreements that can put you in an ongoing cycle of debt or even put your business under if you aren’t careful.

An experienced MCA attorney can help you understand the intricacies of the contract and negotiate more favorable terms for you. An MCA debt help attorney can also point out any clauses that could put you at risk financially, such as a Confession of Judgment (COJ) or personal guarantees. They can help you understand how the MCA impacts your personal and business credit.

Should you encounter any UCC lien issues or legal action from an MCA provider down the road, having an experienced MCA attorney on your side and involved from the start can serve as a form of protection. At the very least, knowing that a licensed legal professional has reviewed and approved the contract can give you some peace of mind.

Tayne Law Group is a New York-based law firm that has been helping clients resolve merchant cash advance debt and other business debt for over 20 years. If you’re considering an MCA or struggling with MCA debt (or other business debt), reach out for a no-obligation, free phone consultation at (866) 890-7337. Or you can fill out our short contact form, and we’ll reach out shortly. All conversations are confidential, and we never share or sell your information. 

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