Merchant cash advances (MCAs) are marketed as a fast and easy way to access capital. Small businesses in need of immediate cash often turn to these advances when traditional financing isn’t an option. However, while MCAs can provide short-term relief, they frequently create significant long-term financial problems that far outweigh their initial benefits.
For those already struggling under the weight of MCA debt, MCA debt consolidation can offer a way out, but it must be approached with caution. Working with a knowledgeable business debt relief attorney can help small business owners avoid common pitfalls and navigate this complex process more strategically and safely.
The Predatory Merchant Cash Advance
An MCA might seem like a good option when a business needs cash quickly, but the downsides often reveal themselves soon after the agreement is signed.
MCAs aren’t structured like traditional loans. In fact, they aren’t really loans at all. Instead, they involve selling a percentage of the business’s future sales (not actual receivables) in exchange for immediate funds. Unfortunately, this arrangement often traps businesses in a hamster wheel of debt, chasing more and more debt with no end in sight.
Key MCA Consequences
- High Interest Rates: MCAs carry extraordinarily high annual percentage rates (APRs), often in the triple digits. These exorbitant rates make it difficult for businesses to repay the debt without taking on further debt.
- Frequent Payments: MCA repayments are made through daily, weekly, or monthly withdrawals from the business’s revenue, leaving little room to cover operating costs or plan for future growth.
- Lack of Transparency: The terms of many MCA agreements are vague or difficult to understand, which can lead to business owners unknowingly accepting unfavorable conditions.
- Debt Trap: Because of the high fees and frequent withdrawals, many businesses end up taking out additional MCAs to cover the cost of the first one, creating a dangerous cycle of debt that is hard to escape.
- Frozen Bank Accounts: If a business defaults on its MCA, the lender may freeze their bank accounts until the debt is repaid, leaving them with minimal or no access to much-needed capital.
- Customer Harassment: MCA lenders file and use UCC liens to go directly to a business’s customers in order to collect monies owed. Moreover, some use scare tactics via social media or even showing up in person; either of which can be disastrous to a company’s reputation and employee morale.
For these reasons, MCAs are often not the best long-term financial choice, and they can lead to deeper financial problems than the ones they were intended to solve. Unfortunately, predatory lenders have already sucked many small businesses into troublesome contracts.
Is MCA Debt Consolidation the Answer?
For businesses that are already burdened with significant MCA debt, MCA debt consolidation may offer a way to regain control over their finances. By consolidating multiple MCA obligations into a single, more manageable payment, businesses can potentially lower their monthly payments and reduce the stress of constant withdrawals.
However, MCA debt consolidation is not without its risks and should be approached carefully, with help from an experienced business debt relief attorney.
Below are the major pros and cons to consider about MCA debt consolidation.
Potential Benefits of MCA Debt Consolidation
- Simplified Payments: Instead of managing multiple daily or weekly payments to different MCA providers, consolidation allows businesses to make a single payment, reducing administrative stress.
- Potential for Lower Interest Rates: Depending on the consolidation loan’s terms, the business may be able to secure a lower overall interest rate than what was charged on the original MCAs.
- Improved Cash Flow: By consolidating debt into a longer-term loan, businesses may be able to extend the repayment schedule and reduce the size of their regular payments, freeing up cash for operating expenses.
Potential MCA Debt Consolidation Pitfalls
While MCA debt consolidation can provide some relief, it’s important to recognize that it is not a cure-all. The business is still responsible for repaying the total debt, and in some cases, the consolidated loan may come with its own set of fees and interest charges that could be problematic. Without proper legal guidance, businesses may find themselves in yet another precarious financial situation.
Some common pitfalls are:
- Hidden Fees: Some debt consolidation plans include additional fees that can add up over time, eroding the benefits of the consolidation itself.
- Collateral Risk: Some lenders require businesses to offer collateral in exchange for a consolidation loan, putting critical business assets at risk if the loan cannot be repaid.
- Ongoing Debt Cycle: If the consolidation loan terms are unfavorable or the business does not address the underlying causes of its financial difficulties, consolidation may simply delay the inevitable, rather than provide a real solution.
When to Consider MCA Debt Consolidation
If your business is facing an unsustainable level of MCA debt, now is the time to explore options that can guarantee your business much needed relief. An MCA debt consolidation plan, when handled properly, can provide much-needed breathing room, and help to regain financial stability.
However, this decision should not be made lightly because there may be other, better options, depending on your situation. Here are some points to consider prior to agreeing to a consolidation plan.
Checklist for Assessing MCA Debt
Review the Total Debt Amount: Calculate how much is currently owed across all MCA agreements, including interest, fees, and any other charges. Evaluate Cash Flow: Assess how the current MCA payments are impacting the business’s ability to cover operating expenses. Analyze the Terms: Carefully review the repayment terms of each MCA, noting any red flags, such as high interest rates, daily withdrawals, or unclear language. Consider the Risks: Weigh the potential consequences of continuing with the current MCA structure versus consolidating the debt. Consult with an Attorney: Before moving forward with any consolidation plan, consult with a business debt relief attorney to ensure the plan is sound and won’t lead to further financial hardship.
Why Professional Legal Help is Essential
Given the complexity and potential risks associated with MCA debt consolidation, working with a business debt relief attorney is crucial to ensuring the business avoids unnecessary pitfalls.
How The Lane Law Firm Can Help
The attorneys at The Lane Law Firm are well-versed in MCA contracts and debt relief strategies, helping businesses navigate the consolidation process safely.
- Reviewing MCA Contracts: Our team will carefully review the terms of existing MCA agreements to determine whether they contain any unlawful or predatory clauses that can be challenged.
- Negotiating with Lenders: In many cases, our attorneys can negotiate with MCA providers to reduce the total debt or secure more favorable repayment terms as part of a consolidation agreement.
- Protecting the Business: By handling communications with MCA providers and ensuring all agreements are in the best interest of the business, we shield business owners from aggressive collection tactics and predatory lenders.
If your business is struggling under the weight of MCA debt, The Lane Law Firm can help you. With a thorough understanding of MCA contracts and a commitment to protecting businesses from predatory practices, we’ve helped many small businesses escape the cycle of MCA debt and regain financial stability—and we can help your business, too.
Reach out to our team for a free consultation to discuss MCA debt.
