Merchant cash advances (MCAs) can feel like a lifeline when your business needs quick access to capital, but the repayment terms often become a serious financial strain. Unlike traditional loans, MCAs take a fixed percentage of your daily or weekly sales, leaving you with less flexibility to manage other financial obligations.
If you’re juggling multiple debts as a small business owner, it’s critical to know how to prioritize payments strategically, especially when you’re at risk of defaulting.
Prioritizing Debt Payments Effectively
First, consider what you need to maintain financial stability and keep your business functioning day to day. If you stop paying certain debts, your operations could grind to a halt. For example, if you lease equipment or a retail space and miss payments, you could lose the ability to run your business entirely.
When prioritizing debt payments, rank obligations that are critical to operations — such as rent, utilities, payroll, and essential vendors — at the top of the list. Losing your business’s ability to generate revenue will only make it harder to pay any of your debts, including the MCA.
Create a list of expenses that are vital to keeping your doors open. These obligations should be paid first, even if it means negotiating with other creditors for more time or reduced payments.
Where Does Your MCA Stand in Debt Prioritization?
MCAs are structured as purchases of future receivables, not loans. This means the provider is entitled to a percentage of your sales, regardless of whether you’re profitable. Most MCA agreements include personal guarantees and often Confession of Judgment (COJ) clauses that allow the lender to obtain a judgment against you without first filing a lawsuit if you default.
By contrast, other forms of debt (like business credit cards or bank loans) typically require a more traditional court process before a lender can take collection action. This makes MCA obligations more urgent in the short term since failure to pay can lead to immediate bank account freezes or asset seizures.
Balancing Merchant Cash Advance Repayment With Other Debts
Not all debts carry the same consequences if you miss a payment. MCA agreements are often the most aggressive because payments are taken daily or weekly, and many include personal guarantees or COJs that can put your personal and business finances at risk if you default.
Here’s what to consider when managing MCA debt:
1. Protect Essential Business Operations First
Even if you’re repaying debt, your business needs to be able to function. So, prioritize expenses that keep the doors open and revenue flowing (rent, payroll, utilities, and key vendors).
If MCA withdrawals threaten your ability to meet these obligations, request a reconciliation or reduced payment schedule (more on this below). Many MCA contracts allow you to adjust payments if your sales drop.
2. Pay the Most Legally Threatening Debts First
Once essential operating costs are covered, focus on debts that could shut you down immediately, including MCA payments (due to aggressive enforcement rights) and secured debts (debts tied to collateral, such as equipment or property).
Other unsecured debts (credit cards, some lines of credit) usually carry fewer short-term legal risks and can often be deferred or negotiated.
3. Negotiate with Creditors for Breathing Room
If your MCA is draining cash flow and you can’t keep up with other debts, contact the lenders for your traditional business loans first. They are often more open to temporarily lowering payments or extending terms. Be sure to put all agreements in writing, as verbal promises from creditors may not hold up later.
And importantly, avoid stacking another MCA to “catch up” as this often just makes things worse.
4. Consider Debt Restructuring or Settlement
If your MCA payments and other obligations are unmanageable, restructuring some or all of your debts may be the best option.
- Debt consolidation: This involves consolidating multiple debts into a single, more manageable loan with more favorable terms, a fixed interest rate, and predictable monthly payments.
- MCA settlement: An experienced business debt attorney may be able to negotiate a reduced lump-sum payment or alternative settlement agreement with your MCA provider and help you protect your businesses assets and cash flow.
5. Separate Business and Personal Assets
Because many MCA and small business loan agreements include personal guarantees, your personal bank accounts or property could be at risk. Keep business and personal finances separate so you can better control which accounts are affected if a creditor takes legal action.
When to Seek Professional Guidance
If your MCA payments are jeopardizing your ability to pay other debts or keep your business afloat, it’s important to seek legal professional help immediately. Attorneys who specialize in MCA debt can help you:
- Negotiate lower payments or settlements
- Challenge unlawful collection practices
- Restructure your debt to prevent business closure
- Protect your personal and business assets
The earlier you involve a legal professional, the more options you’ll have.
If you want to relieve the burden of MCA and other debts and get back to focusing on your business, give Tayne Law Group a call at (866) 890-7337 or fill out our short contact form. We can provide a no-obligation phone consultation to learn about your options and how we can help. We never sell or share your information and will keep your matter confidential.
