How to Get Out of a Merchant Cash Advance

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Solutions for the question of how to get out of a Merchant Cash Advance (MCA) depend on the severity of the credit issues to be resolved. In this article, we discuss how to use MCAs responsibly as well as debt solutions that can put you back on the path toward a successful business.


Trapped in a Cycle of Debt

Merchant Cash Advances are designed as a short-term financing solution for companies that have an immediate need for cash. They’re a costly financing option that should be used when the benefits of a business loan exceed the cost of borrowing. Some business owners use them as short-term bridge loans while waiting to be approved for longer-term financing or the collection of outstanding invoice receipts. The MCA is then paid. This is responsible use of debt financing.

Unfortunately, some business owners find themselves trapped in a cycle of debt due to high borrowing costs and the drain on future cash flow. With future cash flow being used to pay off the debt, cash shortages arise again with some owners taking a second MCA. This process repeats until they can’t service the debt and are denied further cash advances.


This scenario results in the question “How do I get out of a Merchant Cash Advance?” But successfully getting out of a Merchant Cash Advance doesn’t resolve the underlying causes for ongoing cash flow problems. By identifying and resolving cash flow issues, the business owner can free up cash for debt repayment.


How to Use Merchant Cash Advances Responsibly

Cash management and responsible use of debt are critical for building a successful small business. Still, even with effective management small companies can periodically experience cash shortfalls. This is the reason why MCAs were designed. They solve an urgent cash shortage problem for up to 90% of business owners who apply. MCAs can typically be deposited into a company’s bank account in just a few days.

Used sparingly and paid back quickly, MCAs can be a useful small business financing tool for those without other options. But the ease and convenience of fast money can quickly turn into debt dependency for some business owners. Due to the high cost of borrowing, MCAs should only be entered into with forethought and a clear plan for repayment.


Opportunities that May Support a Merchant Cash Advance

It’s not unusual for companies to become low on cash and need a short-term financing solution to keep business rolling. Merchant cash advances serve that purpose. But MCAs shouldn’t become a go-to source for business financing every time a company has a cash flow issue. There are times where borrowing is favorable and times to tighten one’s belt and weather the storm.


Typical reasons for a Merchant Cash Advance include:


  1. Profit-making opportunities

MCAs offer small business owners the opportunity to capitalize on profitable investments they wouldn’t otherwise achieve. It could be a large inventory flip or preparation for an upcoming seasonal boom. If the realized profit exceeds MCA borrowing costs, there’s no problem.

When cash from the deal comes in it’s important to pay back the debt immediately to prevent future cash flow problems. There’s no financial advantage for early payment other than the impact on future cash flows but it lowers the company’s debt exposure. The windfall profit should be saved for future investment opportunities or periods of low cash flow.


  1. Bridge Financing

Companies may be waiting for a longer-term commercial loan or for customers to pay their invoices and need immediate cash to pay the bills. A Merchant Cash Advance acts as a bridge loan until future monies are received. The MCA is then paid back once cash receipts arrive.


  1. Seasonal Business Loans

Seasonal businesses commonly have fluctuating cash flow. Slow seasons can drain savings leaving business owners without funds to prepare for a seasonal boom. MCAs can help business owners that need to hire employees, purchase inventory, or otherwise prepare. The MCA is then repaid with future receipts. The underlying causes of cash flow issues, however, still need to be addressed. If a business is profitable on an annual basis, then owners need to retain more cash from busy periods to fund slow seasons or find ways to reduce operating costs in off-peak months.


  1. Fill Customer Orders

It’s important to fill purchase orders on time to retain or gain customers. It enhances a company’s reputation as a reliable supplier which is always good for business. Merchant Cash Advances can help companies deliver on their promises. The proceeds from filled purchase orders are then used to retire the debt.


  1. Working Capital Loans

There are times when Merchant Cash Advances are advantageous to fund operating costs. Meeting payroll obligations, replacing revenue-generating equipment, or paying key suppliers are all good reasons for business loans. But if cash flow issues persist, there are problems with your business model. Use some of the business loan proceeds to have a financial check up on your business by a commercial accountant. They can show business owners where they’re leaking cash and set a budget to minimize future cash shortages.


How to Get Out of a Merchant Cash Advance

If you find yourself under a debt cloud of Merchant Cash Advances there are ways to ease the burden. But easing the debt burden only solves one problem. The remaining problem is to identify the causes of cash deficiencies through deep financial and operational analysis.

1. Extend MCA Repayment Terms

It’s possible to have a Merchant Cash Advance repayment period extended to make the payments less burdensome. Remember that your MCA provider wants you to be able to pay back the cash advance. Pushing a company toward insolvency would only jeopardize repayment so they’re likely to help make the payments more manageable.


2. Apply for a Debt Consolidation Term Loan

If you’ve been meeting your payments to date or just recently started defaulting, then you may be able to be approved for a term loan. Contact your Merchant Cash Advance provider to let them know you’re having problems meeting payments and that you’d like to apply for a debt consolidation term loan. A term loan can be structured over a longer term to reduce monthly payments.


3. Asset-Backed Small Business Loans

Companies with fixed assets can use them as collateral for a secured small business loan. Asset-back loans typically carry a lower interest rate and can be structured over a longer time period. Be aware that the assets pledged as collateral can be seized in the event of default.


4. Consult a Financial Expert

If the situation isn’t dire, consulting a financial expert is a good idea. They can analyze past and current financials to find out where you’re leaking cash. They can also produce an operating budget for the future. The solutions below for getting out of a Merchant Cash Advance require that you have a full grasp of your company’s present and future financial position. Having a financial plan will help in negotiating a solution to your credit problems.


5. Contact a Credit Counseling Agency

Contact a credit counseling agency to discuss your problem. Look for a non-profit credit counseling service that provides free services to consumers. The Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC) are two organizations recommended by the U.S. government. The NFCC also offers targeted advice to small business owners.


6. Tap into Your Personal Equity

It’s a scary proposition to put the family home at risk but if you’ve analyzed your financials and find its sound without the crippling debt payments, it may be an option. A home equity loan will provide more favorable terms and the proceeds used to retire the debt.


7. Consult a Bankruptcy Expert

There’s no need to make an immediate decision, but consulting with a bankruptcy expert can help you discover your options. Many will agree to an introductory meeting at no charge. They may be able to negotiate a settlement or devise a repayment plan over an extended period. There’s likely bankruptcy attorneys in your area or you can contact the American Bar Association for referrals.


8. File Chapter 11 Bankruptcy

If all else fails, the remaining option is to apply for a Chapter 11 reorganization. Chapter 11 allows businesses to continue to operate and protects your assets from seizure. Often, debts are wiped clean upon discharge.


Putting It All Together

It’s important not to panic while figuring out how to get out of a Merchant Cash Advance. The potential credit solutions we’ve discussed involve resolving debt problems while keeping your business alive. A level head will go a long way toward a successful outcome. No matter which options you pursue, be prepared to be put on a strict operating budget to fix the flaws in your business model.

If there’s time and money available, enlisting a commercial financial accountant is a good first step. A financial plan shows creditors that you have a thorough understanding of your company’s debt problems and a forecasted budget that will solve the problems going forward.

If the situation is urgent, contact one of the non-profit debt counseling services recommended by the federal government. They’re free and will outline available options as well as steps to take toward a successful outcome. The NFCC’s small business debt counseling service is a good place to start.

All solutions listed will show you how to get out of a Merchant Cash Advance and put your business on a more solid footing. But solving immediate credit issues is only a short-term solution. Business owners need to understand the underlying financial flaws and cash management issues as well as the responsible use of debt financing. Effective financial planning is the primary path toward long-term success.

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