How Do I Stop Paying a Merchant Cash Advance?
Getting out of a merchant cash advance (MCA) can be tricky, but it is possible. I’ll walk ya through some options to consider if you wanna stop making payments on an MCA.
What is a Merchant Cash Advance?
First, a quick refresher. A merchant cash advance is a form of business financing where a company called an MCA provider gives you an upfront lump sum of cash in exchange for a percentage of your future credit card and debit card sales.
Unlike a small business loan, an MCA isn’t a set amount you pay back monthly. Instead, the MCA takes a cut of your daily credit card sales – usually 10-20% – until you pay back the original funding amount plus a fixed fee.
So if you got $100,000 upfront, the MCA may take 15% of your daily credit card sales until you pay back $130,000 total. The payback amount and percentage taken varies depending on the MCA provider.
-Why Do Business Owners Want to Stop Paying?
There’s a few common reasons business owners decide they want to stop making payments on their merchant cash advance:
- The payments are too high and hurting cash flow
- Business has slowed down so the MCA is taking too large a cut of slim sales
- They didn’t fully understand the terms and realized the payback amount was more than expected
Whatever the reason, many biz owners quickly realize how expensive and inflexible MCAs can be compared to other financing options.
If you feel like you’re drowning from huge daily payments that never seem to end, you’ll probably want to look into your options for getting out of your MCA agreement.
Can You Legally Stop Paying a Merchant Cash Advance?
Now for the tricky part – legally breaking ties with your MCA provider before you’ve fully paid back the amount owed.
There’s a couple potential avenues here, but none are guaranteed slam dunks:
1. Negotiate a Settlement
The easiest option is to negotiate a settlement with your MCA provider. This means both sides agree to an amount less than what you originally owed in order to close out the agreement.
Many providers are open to settlements since they’d rather take a partial payment than deal with a default. Each company has their own settlement policies so terms vary.
That said, because MCAs don’t follow state lending laws, providers have a good amount of power and you likely won’t get extremely generous settlement offers unless you have a solid case for one of the options below.
-2. Refinance with Another Lender
If you have decent business credit and financials, you may be able to qualify for a small business loan or line of credit with better rates and terms that your MCA.
Banks typically offer lower costs, longer payback periods, and more flexibility than MCAs. If you can get approved, you can use the funds to pay off your merchant cash advance in full, breaking ties with your current provider.
We have partnerships with various lenders that work with all types of business credit scores and financial backgrounds. So even if you’ve struggled with past debts, we may be able to find an option that helps eliminate your MCA burden.
3. File for Bankruptcy
Declaring business bankruptcy stops collections and wipes out many types of business debt. Merchant cash advances are treated as commercial loans in bankruptcy court.
So if you file Chapter 7 or Chapter 11 bankruptcy, your MCA balance would likely be discharged along with other debts. Just be aware bankruptcy also comes with major damage to your business credit and ability to get financing.
An experienced small business bankruptcy lawyer can advise if this route makes sense or if settlement and refinancing may be better options.
4. Prove Fraud
While rare, some providers engage in outright fraud – lying about terms, illegally accessing accounts, etc. If you can prove fraudulent activity, you may be able to stop payments and even sue for damages.
Documenting a legitimate fraud case takes extensive evidence and legal help. But if you were truly scammed, an attorney may be able to build a case to release you from balances owed.
What Happens if You Just Stop Paying?
Legally speaking, merchant cash advances don’t follow state lending laws and regulations in the same way loans do. So providers have a lot of leeway to pursue various collection tactics if you default.
If you just stop making payments without taking any legal steps, here’s some consequences you’ll likely face:
- The MCA will switch your credit card processor and take over your receivables
- They’ll apply huge fees and penalties – often 100%+ of your balance
- Non-stop calls from the MCA and collection agencies
- Potential lawsuits and threats to garnish business accounts
- Huge hits to your personal and business credit scores
So while it may be tempting to cut off payments if your MCA feels unfair, don’t expect providers to walk away. They’ll aggressively use legal options at their disposal to recover owed amounts.
-Steps to Request Stopping MCA Payments
If you’ve decided you want to stop paying your merchant cash advance, here are some logical steps to take:
- Review your agreement’s terms so you understand the provider’s rights if you default. Know what you’re getting into.
- Contact the MCA company to see if they’ll negotiate a settlement. See what amount they’d accept as payment in full.
- If no settlement is possible, speak with a business lawyer to discuss refinancing, bankruptcy, or building a fraud case as potential options before stopping payments.
- If you have a legitimate case and legal backup, send a formal letter stating you believe the agreement is invalid and will no longer be paying.
- Open new business banking/credit card accounts so the MCA can’t access your funds or process daily payments if they fight back.
- Be prepared for collections calls and potential legal action. Document all communication and stand firm if you have a valid case.
With the right evidence and lawyer support, there are certainly ways to eliminate an unfair or unmanageable merchant cash advance agreement. But you need to be strategic about taking legal, well-documented steps.