The Predatory Nature of MCAs
Merchant cash advances are typically a last resort for businesses facing financial challenges. These transactions involve selling a portion of future receivables to an MCA provider in exchange for a lump sum, with repayment made through daily or weekly automatic debits from the business’s account. MCA providers often structure these contracts to resemble sales rather than loans to avoid usury laws. In reality, the interest rates on MCAs can exceed 100% annually.
Finding a Way Out
Even when a business is drowning in MCA debt, it still has options to free itself from this financial burden. Many businesses with MCA debt also have a main lender. This main lender has the first right to the company’s assets. They may even have a guarantee from the owner.
MCA providers usually have a lower priority, meaning they’ll only recover funds if the business is liquidated and there’s money left after paying off the senior lender, which is often not the case.
Understanding this, especially with changes in the law making it harder for MCAs to recover their funds quickly, MCA providers are more willing to negotiate short-term and long-term relief for struggling businesses.
Short-term relief temporarily reduces daily or weekly payments, often by 50% to 75%, for 30 to 60 days or more. You can negotiate long-term relief by settling the loan for a significantly reduced amount. Typically, businesses negotiate this at a discount of 25% to 50% or even more.
The senior lender is important because they have to agree to any deal, which gives businesses more power. MCA providers know it’s better to get paid something than nothing, especially if they are lower on the list.
A business can obtain a loan from the mezzanine lending market if it lacks funds to pay the MCA provider. This loan can be used to repay the debt. This restructures the debt, reducing the cost of capital and extending the repayment timeline.
The senior lender benefits from this because it strengthens their client’s business, lowering their credit risk. The sub-debt lender gains a new client. They earn a decent return for a short time. The typical duration is 9 to 15 months. Lastly, the company owner benefits from eliminating the burdensome MCA loan and replacing it with an affordable option that the company can repay relatively quickly.
As laws evolve in favor of merchants, there’s an improving market for managing stacked MCA debt. Lenders, factors, and clients can lower credit risk, keep their client list, and gain new business, despite having stacked MCA debt. The key is taking a proactive approach to address MCA debt and help businesses escape this financial trap.
A Brighter Future for Managing Stacked MCA Debt
Contact our debt consultants at Coastal Debt Resolve if you have a merchant cash advance debt and need help. We can provide relief options for you. We offer free consultations and personalized solutions for your specific needs. Coastal Debt Resolve can assist with consolidating, restructuring and settling MCA debts.
