Merchant Cash Advances: Did A Wolf In Sheep’s Clothing Leave Your Business Without Access to Funds?

Sometimes, something that appears to be a dream come true at first glance turns out to be a nightmare. That’s the case for many small business owners who take out Merchant Cash Advances (MCAs).

MCAs are marketed as a quick fix — fast money, no collateral, minimal paperwork. For a business owner under pressure, it feels like salvation.

But the reality? An MCA is often a wolf in sheep’s clothing that punches you in the face and takes your goodies — potentially your business’s assets and future. Many businesses are unable to keep up with the high payments and find themselves trapped. MCAs can send letters to your customers and turn off your cash flow. They can also send restraint notices to credit card companies. This can make it impossible to keep up with basic expenses, including payroll for valued employees.

Filing bankruptcy can free up that cash flow. MCAs must retract restraint letters after your business files for bankruptcy.

How MCAs Work

Although MCAs are often referred to as loans, they are not technically loans, and the rules, regulations, and protections that apply to typical business loans do not usually apply to them. At its core, an MCA is an advance against your business’s future sales.

The primary selling point is that instead of waiting for revenue, you get cash up front. In return, the MCA provider takes a percentage of your future receivables. Many contracts require daily or weekly automatic withdrawals directly from your bank account, or a percentage of your credit card receivables. If payments stop, MCAs often send restraint letters to customers demanding that ALL payments go to the MCAs. This can paralyze a business, but a business bankruptcy can help.

Why MCAs Are Costly And Risky

MCAs are substantially more expensive than small business loans — sometimes staggeringly so. Here’s why:

• MCAs use “factor rates” instead of interest rates. That makes it difficult to determine the actual cost. Typical MCA factor rates can range from 1.1 to 1.5 or higher. For example, if you have a $100,000 MCA, the repayment amount ($100,000 multiplied by 1.1 – 1.5) could range from $110,000 to $150,000, depending on the terms of your contract with the MCA company.

• Effective APRs can climb sky-high, ranging from 70% to 400%, which is significantly higher than conventional loans.

• High origination and administrative fees, as well as hidden charges, stacked on top of the already high costs, make MCAs even riskier.

• Contracts are often confusing, with hidden clauses, prepayment penalties, and terms that skew the balance of power in favor of the MCA provider. Contracts frequently give MCA companies broad authority to garnish accounts or seize assets by requiring businesses to agree to a consent judgment if there is a default in payments.

MCAs may resemble “business funding,” but under the hood, they’re more akin to hard money loans that can be extremely costly.

The Debt Spiral

Here’s the pattern we see again and again:

1. A business hits a rough patch and takes an MCA for quick help.

2. The repayment terms are so steep that cash flow gets even tighter.

3. To keep afloat, the business takes out another MCA — and then another.

Debt snowballs, payments stack up, and soon the MCA has a chokehold on your finances.

Why Owners Get Lured In

When you believe in your business, it’s easy to think that a cash infusion will help you turn the corner, but many owners later say the MCA turned out to be the worst business decision they ever made.

The old adage applies: If it sounds too good to be true, it probably is.

Bankruptcy As A Possible Solution

If MCA payments are crushing your business, a business bankruptcy can provide relief and a way forward:

• Chapter 11 business bankruptcy allows your business to continue operating while you restructure debts. Depending on your circumstances and eligibility, Chapter 11, or Chapter 11 Subchapter V for small businesses, may be a great option.

• The automatic stay in bankruptcy stops all collection efforts — including aggressive MCA withdrawals, threatening phone calls, and restraint notices.

• Bankruptcy can give you the ability to formulate a Chapter 11 plan that resolves all of the debt and lets the business come out of bankruptcy in a better position.

Dealing with MCA debt is complicated, but it’s doable with the help of an experienced bankruptcy attorney like Jeffrey Ainsworth and his team. We’ve helped many small businesses file a business bankruptcy to reduce their MCA burdens, negotiate settlements, and reorganize their business.

If your MCA was personally guaranteed, that adds another layer of risk. But it’s something we can help you navigate.

Legal Trends To Watch

Courts are starting to see MCAs for what they are: loans disguised as “purchases of receivables.”

A recent New York case highlights this shift. Judges who pierce through the labels may give business owners crushed by MCA debt powerful new options to fight back in bankruptcy court. Judges are beginning to treat MCAs as loans, which means they may be subject to loan laws — opening the door to disallowing the debt.

Every Case Is Unique

For some businesses, negotiation may be enough. However, many business owners put off the idea of filing a business bankruptcy or personal bankruptcy at all costs, and they spend a lot of money trying other unsuccessful avenues. Dealing with debt through bankruptcy may be the affordable solution that allows your business to survive and rebuild.

Bankruptcy Can Be Complicated. We Are Here To Help.

Our experienced business bankruptcy team at Branson Law, led by Jeff Ainsworth, is here to help guide you through this difficult situation. Although we cannot guarantee the outcome of your case, we will assess your situation and determine whether bankruptcy is in your best interest, and if so, which type.

Branson Law is here to guide you through the challenging bankruptcy process and help you protect your financial future. By taking proactive steps now, you can ensure you have access to the debt relief you need. Don’t wait until it’s too late—start the process today to secure a more stable financial situation tomorrow. Contact us today to protect your business and its employees, your income, and your future.

We are located in Orlando, Florida, and handle bankruptcy cases throughout the State of Florida. Contact us today if you live in, own property in, or operate a business in Florida and are unable to manage your debt. We can help you understand your options. Our goal is to help you so you can sleep at night.