How Do I Stop Paying An MCA
Merchant cash advances (MCAs) can seem like an easy way to get quick cash for your business. But they come with some major downsides that can leave you trapped in a cycle of debt. If you find yourself unable to keep up with the payments on your MCA, you may be wondering if there’s a way out. Here’s what you need to know about stopping MCA payments and getting out of these tricky agreements.
Why You Might Want Out of Your MCA
There’s a few main reasons small business owners end up regretting their MCA and wanting to stop payments:
-- The payments take too much of your revenue – With an MCA, you repay the advance through a percentage of your daily credit card sales. This can eat up 20-40% or more of your revenue, leaving you strapped for cash.
- You’ve stacked multiple MCAs – It’s common for business owners to take out a second or third MCA to help cover payments on earlier ones. This stacking compounds the high fees and can quickly become unmanageable.
- You didn’t understand the terms – MCA companies aren’t always upfront about the true cost. You may not have realized just how much of your sales the payments would consume.
- Personal liability – If you signed a personal guarantee, your personal assets are at risk if you default. This gives MCA companies tremendous leverage over borrowers.
- Risk of lawsuits – MCA lenders are quick to sue borrowers for breaching the contract. Lawsuits can destroy your business and personal finances.
The bottom line is MCAs simply aren’t sustainable for many businesses. Getting out of the agreement may be your best option before things spiral out of control.
Ask the MCA Company for Relief
Before taking more drastic steps, it’s worth reaching out to your MCA provider to explain your situation. They may be willing to offer some relief, such as:
- Lowering the daily repayment percentage
- Allowing a temporary pause on payments (forbearance)
- Extending the repayment term
- Accepting a discounted payoff amount
It never hurts to ask! The MCA company would rather get some money from you than force you into default. Be honest about your financial hardship and see if they’ll work with you.
Having an attorney send the request on your behalf can add credibility. They’ll know your rights under state laws and how to effectively negotiate.
-Refinance the MCA Debt
If the MCA company won’t budge, look into refinancing the debt with a small business loan. This replaces the MCA with a more manageable form of financing.
Term loans are a great option, with lower interest rates and monthly payments. You’ll also have a fixed end date, unlike an MCA that goes on indefinitely. Just be aware that term loans require decent credit and time to get approved.
Asset-based loans use your business assets as collateral. This gives lenders more security, so they offer better rates and terms than MCAs. Just know that your assets are at risk if you default.
Refinancing gets rid of the MCA for good. You’ll have one monthly loan payment rather than daily deductions from your bank account.
File for Bankruptcy
If your finances are in really bad shape, bankruptcy may be your best recourse. This legally discharges certain debts and protects you from creditors. Here are two options:
-Chapter 11 allows you to restructure debts so your business can stay open. It’s available to all business structures. The process takes several months and requires working with a trustee.
Chapter 13 is for sole proprietors with regular income. It allows individuals to reschedule debts into a 3-5 year repayment plan. Only unsecured debts like credit cards can be discharged.
Bankruptcy damages your credit but prevents creditors from garnishing your wages or assets. An attorney can advise if it’s the right path forward.
-Settle the MCA Debt
If bankruptcy isn’t appealing, debt settlement may be an alternative. This involves negotiating to pay a lump sum that’s less than the full balance owed.
For example, if you owe $50,000 on an MCA, you could potentially settle it for $30,000. This requires:
- Saving up enough to make the settlement offer
- Proving you can’t afford the full amount
- Being firm in negotiating a discounted payoff
It’s smart to work with a debt settlement attorney to handle negotiations. They have leverage and experience getting MCA companies to accept reasonable offers.
Settlements allow you to resolve the debt on more affordable terms. Just know that the remaining balance is forfeited.
Take Out an Installment Loan
A great way to pay off an MCA entirely is by taking out an installment loan, also known as a term loan. This gives you the funds to pay off the MCA balance in full.
Term loans have fixed monthly payments, lower rates, and longer repayment periods than MCAs. You’ll need decent credit to qualify for the best rates.
Taking out a term loan simplifies things by replacing the MCA with one predictable monthly bill. Just be cautious of overextending yourself with too much debt.
Increase Sales and Cash Flow
If you’re bound to the MCA contract, focus on paying it off faster by increasing profits. Bring in more revenue and reduce expenses to have more cash free and clear.
- Raise prices judiciously
- Add new products or services
- Reduce operating costs
- Renegotiate terms with vendors
- Advertise to attract new business
- Incentivize referrals from happy customers
The more net income your business earns, the faster you can pay off the MCA. This takes persistence but prevents taking on new debt.
Switch Processors
Your payment processor takes a cut of every transaction that goes toward the MCA. Switching to a processor with lower fees means more money in your pocket.
Look for a processor that offers:
- Interchange-plus pricing
- Month-to-month contracts
- No early termination fees
- Responsive customer service
Carefully review and compare fees between processors. Every basis point counts when you’re on the hook to an MCA.
Tips to Avoid MCA Problems
If you do decide to move forward with an MCA, keep these tips in mind:
- Read the fine print – Don’t gloss over the terms. Know the repayment percentage, total amount owed, and when the MCA will be satisfied.
- Be conservative – Only take what you absolutely need and can comfortably afford. Don’t rely on best case scenarios for sales projections.
- Avoid personal guarantees – Never pledge your personal assets as collateral if possible. This puts you at greater risk.
- Have an attorney review the contract – They can spot red flags and help negotiate more favorable terms.
- Don’t stack MCAs – Taking out multiple advances compounds interest and fees. This quickly becomes unmanageable.
- Use MCA funds wisely – Spend them only on business growth, not personal expenses. Have a plan to increase profits.
- Monitor payments frequently – Stay on top of your revenue and how much is going to the MCA each day.
- Communicate with the lender – If you anticipate falling behind, get ahead of it and ask for temporary relief. Don’t let them be surprised.
While MCAs can be helpful in a pinch, they aren’t a long-term solution. Avoid them if possible, and have a plan to pay them off quickly if you do need fast financing.
The Bottom Line
Getting out of a merchant cash advance takes effort but is possible. Start by asking the MCA company for relief or a settlement. Refinancing the debt may also get you more affordable payments. Or if your situation is dire, bankruptcy discharges financial obligations.
With some strategic planning and perseverance, you can break free of an unaffordable MCA. The important thing is to take action before it’s too late. Don’t let fear hold you back from exploring your options. And if necessary, work with professionals like attorneys and accountants to protect your business.
