How to Get Out of a Merchant Cash Advance

Businesses often seek quick access to capital, and merchant cash advances (MCAs) can appear to be a straightforward solution. These advances provide a lump sum of funds in exchange for a percentage of future sales. However, the structure of MCAs can lead to significant financial strain, impacting a business’s cash flow and overall stability. This guide provides strategies for managing or exiting MCA obligations.

Analyzing Your Merchant Cash Advance Agreement

Understanding your merchant cash advance agreement is foundational for developing an exit strategy. Locate your original MCA contract, which contains all terms and conditions governing the advance.

Identify the original advance amount. Locate the total repayment amount, sometimes called the “purchased amount” or “total payback.” This is the total sum your business must repay.

Pinpoint the factor rate, expressed as a decimal, usually between 1.2 and 1.5. This rate is multiplied by the original advance amount to determine the total repayment. For instance, an advance of $10,000 with a factor rate of 1.3 would result in a total repayment of $13,000.

Document your daily, weekly, or monthly payment amount, including frequency and method, such as automated daily debits. Ascertain the remaining balance owed on the advance. Look for clauses addressing prepayment, default, or acceleration, as these terms outline the provider’s rights and your obligations.

Negotiating Directly with Your MCA Provider

Direct communication with your merchant cash advance provider can modify agreement terms. Contact the provider’s collections or account management department as soon as you anticipate payment difficulty. Maintain clear written communication.

Request a temporary reduction or deferral of payments. This provides immediate cash flow relief, allowing your business to stabilize before resuming regular payments. Providers may consider such requests if you demonstrate genuine financial hardship, often requiring updated financial statements.

Consider proposing a lump-sum settlement for a reduced amount if your business can access a significant sum of cash. Providers might be open to this option to recover a portion of the debt quickly, especially if they perceive a risk of default. This strategy often requires showing that a full repayment under the original terms is unlikely.

Alternatively, seek an extension of repayment terms or a reduction in the daily or weekly payment amount. Spreading payments over a longer period lowers the immediate burden. Be prepared to provide current financial statements, including profit and loss statements and balance sheets, and cash flow projections to support your negotiation position.

Seeking External Funding to Repay Your MCA

Securing alternative financing can repay your merchant cash advance, often at more favorable terms. Small Business Administration (SBA) loans are a common option, offering lower interest rates and longer repayment periods compared to MCAs. These loans, such as the SBA 7(a) loan, can be used for debt refinancing if the original debt was for an SBA-eligible business purpose and on unreasonable terms.

To apply for an SBA loan, businesses need to operate for profit in the USA for at least two years, meet SBA size standards, and have a good credit score, usually above 600. The application process involves submitting forms like SBA Form 1919 (Borrower Information Form) and SBA Form 413 (Personal Financial Statement), along with detailed financial statements. Required documentation includes business and personal tax returns for the past two to three years, bank statements for the last six to twelve months, and current profit and loss statements and balance sheets.

Traditional bank loans or lines of credit are also alternatives, often featuring competitive interest rates and structured repayment schedules. Eligibility for these loans hinges on a strong business credit history, consistent revenue, and a solid business plan. Lenders request similar financial documentation as for SBA loans, including business and personal tax returns, bank statements, and financial statements. Secured loans, which require collateral like equipment or real estate, can also provide capital for MCA repayment. The collateral reduces the lender’s risk, potentially leading to more favorable loan terms. Additionally, business debt consolidation loans can combine multiple business debts, including an MCA, into a single, more manageable payment, simplifying financial oversight and potentially reducing overall interest costs.

Addressing Default and Financial Distress

When a business struggles to meet its merchant cash advance obligations, immediate communication with the MCA provider is important. Contacting them as soon as financial difficulties emerge, before missing payments, can lead to more constructive solutions. Proactive engagement can prevent the situation from escalating into more severe consequences.

Defaulting on an MCA can lead to aggressive collection efforts, including the provider pursuing legal action. Many MCA agreements include clauses like a “confession of judgment,” which can allow the provider to obtain a judgment against the business without a full court process, potentially leading to rapid bank account levies or asset seizure. Furthermore, if a personal guarantee was signed, the business owner’s personal assets could be at risk.

Even in a state of default, negotiating a revised payment plan or a settlement remains a possibility. Providers may still be willing to work with a business to recover a portion of the debt, particularly if a clear plan for repayment can be presented. This might involve restructuring the existing debt to more manageable terms, similar to initial negotiation efforts but under more pressing circumstances.

Professional guidance is important when facing severe financial distress. Consulting with a business advisor or an attorney specializing in business debt can provide tailored advice and help navigate complex legal and financial considerations. These professionals can assess the situation, explain available options, and represent the business in negotiations.

Business bankruptcy, such as Chapter 7 or Chapter 11, is a last resort for debt relief. Chapter 7 bankruptcy involves the liquidation of business assets to pay creditors and results in business closure. Conversely, Chapter 11 bankruptcy allows the business to continue operating while reorganizing its debts under court supervision, aiming for a structured repayment plan. The choice between these options depends on the business’s viability and its ability to reorganize and repay debts over time.