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Is a Merchant Cash Advance Strangling Your Business’s Cash Flow? What You Don’t Know About Merchant Cash Advances Can Put Your Business at Risk

Sept. 20, 2022

At BransonLaw, we have represented small business owners that are being crushed by the repayment terms of Merchant Cash Advance (MCAs). When small business owners need cash quickly to cover cash flow or short-term expenses, it’s tempting to sign up for an MCA. They are often advertised as fast, easy money to get you through a rough period. In reality, they are the business equivalent of a payday loan. 

MCAs, sometimes referred to as MCA loans, are not technically loans. They may resemble a loan, in that a business gets money from the MCA company and has to pay it back, but the resemblance ends there. Many businesses have signed on for MCA loans without understanding the harmful payback terms. Repayment of an MCA is neither easy nor cheap. 

At BransonLaw, we have extensive experience in working with struggling small businesses dealing with issues related to MCAs and other types of debts. We can help your business reorganize and create a bankruptcy plan to affordably resolve all debts, including  MCA loans. We can help find options to protect your assets, and guide you through the process of getting your business on better financial footing.  

We recently worked with the owner of a construction company that had $690,000 in unsecured loans that included MCAs. BransonLaw attorney Jeff Ainsworth assisted the company in successfully reorganizing the business through a Chapter 11 bankruptcy. The Chapter 11 reorganization plan allowed the company to pay back less than 10% of the total debt in quarterly payments over a three-year period. The remaining balance of the debt was discharged. The reorganization plan kept the business from shutting down, saved jobs, and enabled the company to thrive.  

What the MCA Companies May Not Want You to Know 

An MCA is an alternate form of financing for businesses and is considered a commercial transaction, not a loan. Therefore, they are not regulated under stricter federal laws such as the Truth in Lending Act. MCA companies provide a lump sum of cash for a business in exchange for a percentage of future sales, accounts receivables, or fixed withdrawals from a business bank account, plus additional fees.  

MCAs are one of the most expensive ways to get financing for your business. Annual percentage rates (APRs) in the triple digits—sometimes as high as 300% to 400%—are not uncommon.   

In most states, MCA companies are NOT legally required to volunteer information to you such as: 

  • your annual percentage rate (APR), 

  • how much more than the original advance you will have to pay back, 

  • and the legal and financial ramifications of defaulting. 

MCA contracts are often confusing, making it very difficult to understand how much money you will actually have to pay back.  

Depending on the contract: 

  • You may lose legal rights, including the right to defend yourself in a dispute about repayment.  

  • You may have limited control over how you repay the advance.  

  • Paying back an MCA cannot build your credit score.  

  • MCA companies can charge higher interest rates and attempt to avoid compliance with state usury laws. These laws limit how much interest can be charged on many conventional loans. Some MCA companies have taken advantage of lax regulations to engage in deceptive practices by misrepresenting how fees and rates are calculated and how repayment plans may impact a business.  

  • Unlike a conventional loan, you cannot save money on interest by paying the advance off early. You pay all of the interest and fees, no matter how quickly you pay back the advance.   

Repayment Terms Can Break the Back of Your Business 

In general, repayment terms are shorter than for conventional business loans—anywhere from three to 18 months. When repayments are based on a percentage of future sales, the MCA deducts a daily or weekly percentage of debit and credit card sales until the advance is paid off. MCAs can also deduct a fixed amount of cash from a business account on a daily or weekly basis regardless of sales. If your business is already having cash flow problems, and MCA could make it worse.  

How Rates and Fees Are Calculated for MCAs—Or, Why Paybacks Are Hell 

Fees are calculated according to something called a “factor rate,” which usually ranges from 1.1 to 1.5, rather than a traditional interest rate. MCA companies look at a number of “factors,” including how long a business has been in operation, debit and credit card transactions, type of business, revenue, personal credit score, and other factors. Businesses that MCA companies consider more risky will be charged a higher factor rate. 

To figure out how much you will have to pay back, multiply the amount of the advance by the factor rate. For example, if you get a $100,000 advance and your factor rate is 1.3, your payback amount would be $130,000.  

Keep in mind that you would be paying back that extra $30,000, along with the $100,000 in a very short span of time, especially when compared to a conventional business loan. Additionally, that $130,000 figure does not include any administrative, underwriting, or other fees that the MCA company may charge. These extra fees can be substantial.  

Since the payback term is so short, an MCA company’s daily or daily or weekly withdrawals from your sales can seriously impact your business’s cash flow, making it harder to meet payroll and other expenses. That can create a need for another advance to pay off the first advance, trapping many businesses in a cycle of debt.  

What Can Happen if You Default on Payments  

This can happen if your business doesn’t have enough money in your account or doesn’t have enough sales to cover the agreed-upon amount. Possible outcomes include: 

  • The MCA company can “call the loan” forcing repayment of the entire amount by taking it out of your account when money is added to the account. In some cases, this can happen with one missed payment.  

  • If you have signed a “confession of judgment” clause, something that many MCA companies require, you will not have the right to defend yourself if there’s a breach of the contract. The MCA can file a lawsuit against you and potentially seize your business assets. 

  • Depending on how the contract is written, some MCA companies require a personal guarantee, meaning your personal assets and finances could be used for repayment.  

BransonLaw Can Help 

If you have already signed an MCA contract and cannot afford the payments, BransonLaw can help you determine your options and help you protect your business by filing a reorganization under Chapter 11 Subchapter V bankruptcy. Our firm has filed more Chapter 11 Subchapter V bankruptcies than any other law firm in the Middle District of Florida. Let our experience help you.  

If you are considering an MCA loan, it’s worth looking into whether there might be another conventional business loan that can help your business. Contact us before you sign an MCA contract and let our team review the contract so that you know what you are signing up for.