It’s very easy to get into a merchant cash advance. It’s not so easy to get out of one, but it can be done if you follow the three-step process recommended by the experts.

Merchant cash advances (MCAs) are one of the fastest, easiest ways to free up business cash, so it’s no wonder they are being used by more and more businesses. The MCA industry is already worth $19.73-billion globally and is projected to reach $25.79 billion in the next four years. 

Once limited to retail companies that could borrow against customer receipts, MCAs have now become a resource for B2B companies. MCA lenders are now extending credit to businesses based on their bank deposits, which enables companies in industries such as staffing, trucking, and manufacturing to access this source of funding. After reviewing the business’s monthly deposits, the MCA lender predicts the amount of future deposits and advances a sum of money based on that prediction. 

If your business has taken out an MCA, here is what you need to know about protecting it from a worst-case scenario.

Sliding into “stacking”

Many businesses seeking to get out of an MCA have achieved the goal by relying on the expertise of Marc Mellman. A financial and legal specialist with a 48-year professional career, Mellman has spent more than two decades assisting small to medium-sized companies with financial management challenges. Most recently, he founded MCA Stacking Solutions, a business solely focused on helping companies escape catastrophic MCA agreements.

When clients reach out to Mellman, they are often trapped by a series of “stacked” MCAs, where a business has taken out a second MCA to service the first, and then a third to service the second, and so on. Mellman has seen cases where a company has as many as 14 stacked MCAs on the books. 

“It’s very easy to fall down a rabbit hole,” he said. “And the harder these businesses work to climb out, the farther they fall.” 

3 steps to escape an MCA

Mellman’s approach to freeing a business from an MCA (or a series of stacked MCAs) is deceptively simple. In every case, he follows a three-step formula. While the companies Mellman works with tend to have MCAs in the range of $200,000 to several millions, he said that companies with smaller MCAs can use the same formula to break free without the help of an expert.

Step 1: Negotiate for lower payments

Most businesses don’t realize that they can negotiate a different payment schedule with the MCA company. While the contract may specify an aggressive, daily repayment timeline, many MCA companies are willing to slow things down if you can demonstrate that you are genuinely unable to meet the original terms. 

“MCA companies sell tranches of the loans to investors who expect to see a return on their investment,” Mellman explained. “They need to keep those investors happy.” 

This means they have a stake in ensuring that the business can continue to pay down the advance. “The MCA company will argue and complain, but at the end of the day, they want to get paid.”

Step 2: Negotiate a discount

Many times, the MCA will also be open to reducing the amount owed if you can repay the advance on an accelerated schedule. 

“MCA debt can be paid off at significant discounts when a party is in the position to pay it in a lump sum,” said Mellman. “Because of the ridiculous return on investment that is built into their contract, the MCA company can still make a phenomenal income if they only collect half of the money that’s owed.” 

Mellman advises his clients to seek out every opportunity to raise the funds, whether through friends and family, a personal loan or other means. With a cash settlement as leverage, Mellman has been able to negotiate discounts of 10-40% for his clients. 

Step 3: Find alternative financing

If the business can’t find the money to repay the MCA, Mellman works to find alternative financing that could help them to repay the advance ahead of schedule and take advantage of the opportunity to negotiate a discounted rate. 

If the business has sizable accounts receivable (AR) on the books, Mellman recommends invoice factoring as a way of freeing up the needed cash, and often partners with AR Funding in these cases. 

AR Funding works with these businesses to determine whether their AR is healthy enough to pay off the MCA on an accelerated timeline. In these cases, AR Funding can advance up to 92% of the AR funds immediately, which can be used to repay the MCA.

Protecting your future

There is one final step in future-proofing the financial security of your business. Once you have paid off the MCA, take a moment to think about how you can avoid the situation in future. What can you do differently on a day-to-day basis?

Mellman believes that establishing a relationship with a responsible financial consultant is the key. “Business owners are smart and resourceful, but they don’t always know how to manage a company financially,” he explained. “They often have a blind spot where their own business finances are concerned, and they need a trusted person who can advise them on their financing options as they grow.” 

Having a flexible factoring line in place can also take some of the financial pressure off the business. Factoring can provide a source of emergency cash that’s there when you need it, but doesn’t charge fees and interest when you don’t.  

You always have options 

If an MCA is putting your business at risk, you still have options, and knowing what those options are can help you make better decisions. If you have an active MCA agreement in place and would like to learn more about how to get out of it as quickly as possible, reach out to the experts at MCA Stacking Solutions. If you have a healthy amount of revenue sitting in your AR, talk to an expert at AR Funding. We’re here to help/

Learn more about MCAs by reading these blog posts.

The hidden perils of MCAs: A financing expert reveals all. Find out how a business services company nearly lost everything due to an MCA agreement.

MCAs vs. invoice factoring. Learn the difference between these two types of alternative financing and find out which one is best for you.

What you need to know before taking out an MCA. If you haven’t signed the contract for an MCA yet, read this blog post before you do.