How to Get Out of a Merchant Cash Advance

Last Updated October 29, 2024

One of the go-to loans for business owners that need cash quickly is a merchant cash advance, or MCA. But if you’re a small business owner who is short on cash and desperately needs funding as soon as possible, you might not have devoted the necessary time to thoroughly analyze the effects an MCA might have on your financials in the long-term. Ultimately, you might realize it was the wrong choice.

While MCAs may deliver funds efficiently, they can be incredibly difficult to get out of if it’s hurting your business more than it’s helping. MCA contracts are notorious for having certain variables written in the fine print that can be easy to gloss over as well.

If you find yourself in this sticky situation, know that you have some options that can help mitigate any potential losses. Getting out of a merchant cash advance is possible, but it’s going to take some creativity and research (like you’re doing by reading this article!). With that said, continue reading to learn more about your options.

What Is a Merchant Cash Advance?

A merchant cash advance provides you money right away in exchange for a percentage of debit and credit card sales. However, these payments are not loans. Lenders and cash advance agencies calculate a total based on your daily credit/debit card sales then offer you a sum for a future percentage of these totals. They are an indefinite contract that isn’t complete until you repay the total amount to the lender.

The MCA process doesn’t adhere to the same laws as a typical loan, which makes merchant cash advances a little sketchier. The portion you pay back is significantly higher than the amount you borrow, and the end might not come for a long time, depending on how well your business is doing.

When Should You Get a Merchant Cash Advance?

You should only get an MCA in dire situations as a last resort. Otherwise, it can cost your business tons of money and put you at a financial disadvantage. Find some good reasons for getting an MCA below.

1. You Have Bad Credit

If you’ve fallen into a credit pit, you know how hard it is to climb out. Banks and other loan services won’t even bat an eyelash at you if your score is low enough. Since MCAs technically aren’t loans, the companies that distribute them don’t care about your credit score.

Be careful in this situation. Trying to get out of debt or repair credit by borrowing more money is rarely the safest option. Prepare yourself for an MCA that you know you can quickly repay. Then use that money to repair your credit score so you can loan with better interest rates in the future.

2. You Need Liquid Money Fast

Most loans can take weeks to process and aren’t much help in emergencies. MCAs were initially designed to help business owners get the cash they need in a couple of days. In this situation, you need to ask for an MCA that you can pay back quickly.

If you’re sure you can pay back the MCA and you need cash right away, this can be a viable option for your business.

How to Get Out of a Merchant Cash Advance

Now that we’ve established what an MCA is and when to use one, let’s learn how to get out of it. The following methods can be used as either financing alternates, or negotiation tactics to help convince your lender to offer some flexibility.

Extend the Payment Period for the Merchant Cash Advance

MCA providers aren’t trying to create lifelong debts. They want you to pay back the cash advance as quickly as possible, and most are willing to negotiate. You can contact your lender and ask for an extension. They will explain their terms and either approve or deny your request.

Keep in mind that they may want more money for this kind of restructuring.

Renegotiate the Debt

Merchant cash advances are not legally obligated loans. The collection process can be tiresome and time-consuming for both the lender and borrower. Because of this, you might have some leverage when it comes time for the company to collect.

Instead of facing legal action and paying for time in court, the company might be willing to accept a lower immediate payment.

Keep in mind the type of contract you signed with the lender. They will often include “confession of judgment,” which removes your ability to defend yourself in court.

Use a Term Loan Instead

Term loans won’t get you your money immediately, but their interest rates are a lot more generous. You can ask for the amount of money you owe your MCA lender, pay them off, and then begin repaying your term loan at a better rate.

Debt consolidation is the primary purpose of a term loan. That means you can put all of your debts into one loan to make them more manageable.

This is a good idea if your MCA has an increasing interest rate for late payments. MCAs get even more expensive when they go unpaid, so it’s better to get another loan and pay them back immediately.

However, since these loans take a long time to process, you can still end up accruing some extra interest. Fortunately, many online lenders offer loans in a short timeframe.

Consider a Secured or Asset-Based Loan

If you have a large business with many assets, you can apply for this type of loan. During an asset-based loan, a bank or lender will determine the money they’re lending you by the assets your business has. If you fail to pay, then they will be entitled to take over those assets.

Typically, these loans come with a lower interest rate. You have the assets right there, so the lender knows they can get their money if worst comes to worst.

For example, suppose you own a car dealership. If you have $100,000 worth of inventory in cars, you can apply for a loan of $100,000. If you fail to pay in the designated period, they will repossess your inventory.

Be careful about this method because it can put your business in a worse place than you started. If you’re not making enough money to repay, then the bank will seize your assets and leave you without a means to make money.

Switch to Invoice Factoring

Invoice factoring is when a debtor sells their outstanding invoices to a factoring company, for a lump sum of money. Usually, this money is less than the actual invoices are worth. If you have a lot of pending invoices or business transactions on the way, you can use this to get money quickly.

Since factoring isn’t a loan, it is a better method for paying back an MCA. It will help you get the money you need, and you won’t have to worry about additional debts. Just try not to sell so much that your business doesn’t have the money to function.

In-Summary: How to Get Out of a Merchant Cash Advance

Merchant Cash Advances can help a dying business survive. They can get you the money you need to keep your doors open. It’s understandable why some companies and businesses take them, and you shouldn’t worry about doing the same.

We recommend hiring a financial assistant in these situations. They will tell you your best options and if an MCA is the right course of action. If you find yourself in a pickle with an MCA, then try some of our advice above to get you out of it. After some time and headaches, your business will be running strong once again.