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MCA Debt Relief: The Ultimate Guide

Article | March 12, 2019

If your business is experiencing a cash flow crunch and you’re unable to qualify for a traditional bank loan, an MCA can seem like a very attractive solution. Here’s what you need to know.

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All sorts of unforeseen circumstances can lead a business owner to need fast access to cash. Perhaps a large order comes in requiring more stock than you have on hand, and your outstanding receivables won’t hit your bank account for another 45 days. Not having the cash to buy more inventory can bring your business to a screeching halt. Or perhaps you need to make payroll, but a seasonal slump in sales has put a stranglehold on the funds you need to make your various ends meet.

If a cash flow crunch occurs for any reason and you’re unable to qualify for a traditional bank loan, the next step is to turn to alternative lenders. It’s in these hard times that a merchant cash advance (MCA) can seem like a very attractive solution. Before you get in over your head, read this.

Table of Contents

What is a Merchant Cash Advance?
How Do Merchant Cash Advances Work?
Common Pitfalls of a Merchant Cash Advance
What Happens When You Default On a Merchant Cash Advance?
Where to Seek MCA Debt Relief

What is a Merchant Cash Advance?

An MCA is an advance secured by future revenue. Noteworthy for the small business owner is the fact that an MCA is not a loan. For this reason, you don’t need collateral like real estate or other substantial assets to get access to funds.

In addition, other factors make MCAs seem like a struggling business owner’s golden ticket. The application process is easy: you can apply online simply by uploading the required documents, such as bank statements and tax returns, and usually, within 24-48 hours, you’ll receive a lump sum payment.

While strong personal and business credit scores are requisite for traditional loans, your ability to qualify for an MCA relies more upon consistent revenue generation and how long you have been in business. Therefore, MCAs may be available to people with less than perfect credit who don’t qualify for other funding sources, such as a term loan or a business line of credit.

How do Merchant Cash Advances work?

Here are the broad strokes for understanding how an MCA company provides funding for your business.

  • MCA providers will determine the amount of your advance by reviewing three to six months of bank statements and/or credit card processing statements. The advance typically represents 50-70% of average monthly revenue.
  • Repayment installment amounts are set based on a percentage of monthly revenue, generally ranging from 5-20%.
  • The advance is repaid via automatic transfers from your bank account directly to the MCA company. These amounts are withdrawn from your account on a daily basis.
  • Typically, the total cost of the advance is set up front and never changes, as opposed to a loan with a variable interest rate. These costs are included within the daily payments. However, prepayment penalties or late fees can contribute significantly to the actual amount you end up owing the MCA funder.
  • Depending on the advance amount, terms may be as short as 90 days or as long as 18 months. Repayment begins immediately after the funds are received.
  • The cost of the advance is determined by what’s called a factor rate, expressed as a decimal, and usually ranging from 1.1 to 1.5. So a $100,000 advance at a 1.4 factor rate means a payback amount of $140,000.

Common Pitfalls of a Merchant Cash Advance

The installment payments to your MCA company come directly from your operating account and are automatic, which often causes an immediate cash flow squeeze.

Furthermore, although MCAs purchase a specific percentage of monthly revenue, the repayment amount is fixed, so if sales are down or an unforeseen emergency requires the sudden allocation of capital, the daily repayments have the potential to send your business into the red.

The biggest pitfall with MCAs, however, is the fact that the cost of the advance can heavily outweigh the accessibility and convenience that make them so appealing. Since they are not considered loans, MCAs are not regulated by state and federal usury laws like traditional banks are, and can, therefore, charge much higher interest rates–well over the maximum 20%.

Additionally, factor rates make the “interest rate” of your advance appear much lower than it is. This is the leading cause of confusion with MCAs and makes it nearly impossible for consumers to “compare apples to apples” when shopping around for the best lending option. For a deep dive into how your MCA debt is calculated, check out How Much Are You Really Paying For Your Cash Advance?

So, let’s revisit the example above. You receive a $100,000 advance at a factor rate of 1.4, meaning you ultimately owe $140,000 to your MCA company. Paying $40K for your loan seems to reflect an annual “interest rate” of 40%, right? But if your repayment term is only six months, that “interest rate” is effectively doubled to 80%! Coupled with large daily payments going to the MCA funder, you just might find yourself in yet another cash crisis.

Often, business owners become so strapped for cash that they take out a second advance to help repay the first one. This is known as “stacking,” and once a company has more than one MCA, it’s a runaway train careening toward bankruptcy. You may also be tempted to seek MCA consolidation options, but these are only marginally better than “stacking.”

What Happens When You Default On a Merchant Cash Advance

If you see the writing on the wall for your business, the first thing you should do is call your MCA funder and see if you can work out a modification or deferment. Make sure you have thoroughly analyzed your business debt situation, and have created a detailed business debt schedule.

If you take these measures to seek MCA debt relief and get nowhere, you may be left with no other choice than to stop the automatic withdrawal payments. But be warned, because there’s no collateral to back a merchant cash advance, MCA companies use other protections in their contracts to decrease their risk. If they sense that you are defaulting on your advance, two things can happen before you know it.

If you signed a COJ (confession of judgment) as part of your contract, your MCA funder will now file it with the courts. A COJ gives your funder legal recourse to empty your bank account without warning as soon as they stop getting paid.

MCA funders can also freeze your cash flow. They do this by serving your clients with a demand letter asserting that your receivables are their rightful property and insisting that all funds must be redirected to them. These actions can hurt your client relationships and cut the legs out from under your business.

This leaves you with two options:

  1. Close the business
  2. Seek a Hail Mary

In most cases, when you close the business, the MCA funder will have no means of collecting on you. They purchased your ongoing receivables, but since you went out of business and have no further cash flow, that’s the end of your payment obligation. They cannot report this to a credit reporting agency (since they are technically not a lender), and they have no collateral to pursue. For most of our clients with MCAs, the funder makes no effort to collect once the business closes.

But again, you can get into trouble if you do any of the following before closing your doors:

  • Switch bank accounts
  • Interfere with the MCA’s ability to take ACH payments
  • Change merchant services processing companies
  • Take cash or other types of payments to reduce revenue to your bank account.

In the above scenarios, the MCA can accuse you of breaching your agreement and can try to pursue legal recourse. As long as you avoid these actions and wind up your business affairs in a clean manner, there’s nothing to worry about. If you need help in determining the best way to exit and close your company, Second Wind can offer you guidance.

On the other hand, what if you’re determined not to go down without a fight? What does a Hail Mary of this nature look like?

Where to Seek MCA Debt Relief

We understand that defaulting is a scary proposition. The collection calls and harassment from the MCA can be challenging to deal with, especially when you need to focus on rebuilding your company. But you don’t have to do it alone.

Request a consultation with us to discuss your options. Second Wind uses a process known as UCC Article 9 to create an MCA debt relief strategy that stops the daily withdrawals and ensures your personal finances aren’t in jeopardy. From there, we’ll negotiate a realistic settlement with terms that your business can actually meet.

We have saved thousands of businesses from bankruptcy and helped as many owners regain control of their lives. Book your free consultation today and join the ranks of thriving business owners nationwide.


For more information about MCA debt relief, check out this video.


Want to read MCA debt relief case studies?
Scott’s Story: Rebounding From Unsupportable MCA Debt
Nita’s Story: Keeping Her Family Business and Her Father’s Legacy Alive
Second Wind Cuts the Zeller’s Balance Sheet by Nearly $5MM


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