When your business is buckling under the weight of debt, and merchant cash advance collectors are constantly calling, you will need to consult with an attorney who can guide you through the process of devising a plan to pay off the debt for an amount that both parties can agree on. Getting out from under an MCA may be a challenge but not impossible which is why we bring you more information about the process, so that you can know what to expect.
What MCAs are and how do they differ from traditional loans?
With a merchant cash advance, you can obtain revenue on the same day while signing off on an agreement to pay back the borrowed amount in monthly or even weekly installments. Business owners often turn towards an MCA when they can’t qualify for traditional business loans or when they need money right away for a major expense. In some cases, the business owner applies and qualifies for a “loan” online and may not realize that they’ve just received an MCA.
The biggest, but lesser known difference between an MCA and a traditional business loan is that the MCA itself is not necessarily a loan per se. In fact, an MCA means that the company has bought a portion of your future sales which should raise some red flags for you, the business owner. Because MCA companies don’t have to follow the same laws as banks and other lenders, they don’t have to display interest rates or terms. This factor would make it almost impossible for you to compare the cost of an MCA versus a traditional business loan. Instead, you would be responsible for paying a factor rate of 1.1 to 1.5 of the amount that was advanced to you.
The benefits and drawbacks of MCAs
Benefits of MCAs
As mentioned, you can opt for an MCA if you don’t have the proper credit history to qualify for a traditional loan or if you don’t possess anything that can be used as collateral. Plus, you’ll get the money that same day, and rather than dealing with a set interest rate, your payments would decrease if your sales go down.
Drawbacks of MCAs
As you have already seen, MCAs have their disadvantages as well. The repayment amounts become quite unpredictable since their fluctuation correlates with your sales. And because you might know the factor rate upfront (and no interest rate is given), you don’t have a clear idea about the terms which means they might be more costly than other financing options.
What an MCA settlement entails – the process of repaying the advance
To play it safe, first off, you should look into getting legal counsel instead of trying to resolve the issue with the MCA company on your own. An attorney who has experience dealing with MCA companies can help you to come up with a settlement amount that you can afford along with a due date for the payoff that both you and the MCA company can agree on. The settlement documents are then drawn up, and your creditor will need to sign them before you make any payments. Also, you will need to set up that payment from a secure bank account that the MCA company cannot access.
Moreover, the attorney can also guide you through the process of drafting a hardship letter that, with the proper documentation (i.e.: redacted bank statements) accurately conveys the financial burden brought about by the payments to the MCA company.
The role of the factor rate in MCA settlements
The factor rate times the amount of your loan equals the total amount that you have to pay back to the MCA company. Unfortunately, factor rates don’t amortize like interest rates do, so you won’t gain anything by paying off the debt early. Therefore, the factor rate plays a big role since it determines the overall amount of the loan (along with other fees), but at the same time, an attorney can include it as part of the negotiation for a lower payment or discounted payoff.
The benefits of expert insights in navigating complex financial situations
MCA loans aren’t always simple, especially if the “fine print” on the contract turns out to be complex if not misleading. And yes, an MCA company can file suit against you to try to recover their funds. Thus, you should enlist the help of an attorney to negotiate on your behalf rather than fighting alone for your business’s survival. An experienced attorney can spot predatory practices on a contract which gives you a better chance if you have to go to court. Plus, a business debt attorney who specializes in MCA negotiations can ward off a lawsuit from the other party by helping you to reach an agreement that won’t damage your finances any further and will keep the lenders at bay.
FAQ
What are the benefits of an MCA settlement?
The daily or weekly withdrawals made by the MCA company will stop along with any harassing phone calls. Plus, you will finally be on a path toward paying off most of the debt without accumulating any more fees or penalties.
Who can apply for an MCA settlement?
Which defaults are covered under the MCA settlement?