MCA Debt Relief Case Studies
Getting Relief from Merchant Cash Advance Debt
Merchant cash advances can seem like an easy way for small businesses to quickly access capital. You get an upfront lump sum payment in exchange for a percentage of your future credit card sales. But things can go south fast if your business can’t keep up with the daily repayments. Before you know it, you‘re facing aggressive collections calls and threats of legal action.If this sounds familiar, you may be wondering what – if anything – can be done to find relief from overwhelming merchant cash advance debt. The good news is there are a few options, but they require understanding how merchant cash advances work and where you stand legally.
How Merchant Cash Advances Work
Unlike a small business loan, merchant cash advances aren‘t technically loans at all. The funding company purchases a portion of your future credit card receipts at a discount.For example, they give you $100K upfront in exchange for $130K of your future credit card sales paid out over time. That extra $30K represents the fee you pay for the financing.You’ll then repay a fixed percentage of your daily credit card revenue – usually 10-20% – until you satisfy the full $130K. These daily payments are automatically withdrawn from your checking account.The fees and repayment structure make merchant cash advances extremely expensive, with an effective APR often exceeding 100%.
-What Happens If You Default on an MCA
Defaulting on a merchant cash advance happens whenever you miss a payment. Since payments are made daily, it doesn’t take long before you default.Once in default, the merchant cash advance company can take several actions:
- File a confession of judgment to seize your bank accounts or assets without notice
- Impose hefty late fees and penalties
- Send your account to collections
- Sue your business for breach of contract
They can also continue withdrawing payments from your bank account, even if you asked them to stop. Some lenders may try calling your customers to get them to redirect payments.
Options for Merchant Cash Advance Debt Relief
If your business has fallen behind on one or more merchant cash advances, you have several options to seek relief:
Debt Consolidation
The first step is to take stock of how many merchant cash advances you have outstanding and what repayment terms apply to each one.If you have multiple agreements, consolidating them into one new advance can provide immediate financial relief. It eliminates the burden of multiple daily withdrawals hitting your account.A consolidation merchant cash advance combines all the small advances into one larger one, often with lower fees. Just be mindful of any prepayment penalties in your existing contracts.
-Ask Lender for Better Terms
Before consolidating, it’s worth approaching your merchant cash advance lenders directly to ask for relief. Explain why you’re struggling to make the payments and see if they’ll agree to lower daily withdrawals or waive late fees.If business revenue has decreased, your contract may allow the lender to proportionately reduce the daily repayment amount. Don’t be afraid to negotiate – the lender would rather get something than force you into bankruptcy.
Settlement
If you owe significantly more than you could ever feasibly repay, settlement may be an option. This involves negotiating with the lender to pay a lump sum that’s less than the full balance owed.Settlements typically range from 25% to 75% of what you owe. The lender has incentive to settle because they otherwise stand to recover very little if your business folds.Be careful negotiating a settlement on your own. Any verbal promises or agreements made with a merchant cash advance company may not be legally enforceable.
Legal Action
If negotiations fail and the merchant cash advance company refuses to offer relief, consulting with an attorney is the next prudent step.An experienced business finance lawyer can review your merchant cash advance contracts to find potential violations of state laws capping interest rates. If the effective APR exceeds your state usury cap, the contract could be void.
Beware Confessions of Judgement
One of the most dangerous provisions to watch out for in merchant cash advance agreements is something called a confession of judgment (COJ).The COJ gives the lender permission to go to court on your behalf and obtain a judgment against you if you default. Some shady lenders have abused COJs to raid business bank accounts without any notice.In 2022, the FTC banned two merchant cash advance companies from the industry for improperly using COJs to seize funds and bankrupt small businesses. One of the companies was ordered to return $675K of ill-gotten gains.If your contract contains a COJ, talk to a lawyer right away about fighting it. Some states prohibit or restrict their use. An attorney can also review the COJ language to look for deficiencies that would render it unenforceable.
Alternatives to Merchant Cash Advances
The best way to avoid all these headaches is not taking a merchant cash advance in the first place. Consider some alternative small business financing options:
-SBA Loans – Small Business Administration loans feature long repayment terms of up to 25 years, fixed interest rates, and low origination fees.
Business Credit Cards – Cards like Chase Ink or Amex Blue Business Plus offer 0% intro APR periods so you can pay back debt gradually over time.
Invoice Factoring – Also called accounts receivable financing, invoice factoring turns unpaid customer invoices into immediate working capital. Fees are based on invoices, not future card sales.
-Crowdfunding – Platforms like Kickfurther enable you to pre-sell products to customers to finance production. You only have to repay investors after the product sells.
Get Help From a Nonprofit Credit Counselor
If you feel overwhelmed, reach out to a nonprofit credit counseling agency like InCharge Debt Solutions. Their certified counselors offer free advice on assessing your financial situation and managing business debt.They can help you organize documentation, negotiate relief plans, and develop budgets to prioritize paying off your highest cost debts first.
Don’t Wait to Act
The key is acting swiftly when merchant cash advance payments spiral out of control. Every day that passes allows lenders to withdraw more money from your accounts and hit you with additional fees.Take the time to fully understand your legal rights and obligations under any merchant cash advance agreements you sign. Consult with both a business attorney and financial advisor to pursue the relief strategy that works best for your situation.There are always options, even after you default. But waiting makes digging out of the hole that much harder.