Merchant cash advances: what to do when the daily draws stop fitting

The arithmetic of a merchant cash advance works while revenue holds and fails quickly when it does not. Most owners reading this are not in trouble because they made a bad decision once; they are in trouble because they took a second advance to cover the first, and a third to cover the second, and the daily debits now consume more of the day’s takings than the business generates.

If that is where you are, here is what is actually available.

What you signed, and why it matters

An MCA is not a loan. Legally it is a purchase of future receivables at a discount: the funder buys, say, $130,000 of your future sales for $100,000 today, collected as a fixed daily or weekly ACH debit or as a percentage of card settlements.

That structure has three consequences.

There is no interest rate, so usury caps generally do not apply. The “factor rate” — 1.3 in the example — is not annualised anywhere in the document. Repaid over six months, that is an effective annualised cost most owners would not have accepted if it had been stated as a percentage.

It is usually personally guaranteed, at least by a performance guarantee that converts to full personal liability if you breach the agreement. Breaching includes blocking the debits.

It may include a confession of judgment, depending on your state and when you signed. A COJ lets the funder obtain a judgment without a hearing. New York — where a great many MCA agreements are governed — barred their use against out-of-state defendants in 2019, but older agreements and other structures still circulate. Look for the phrase in your documents.

The one thing not to do

Do not close the bank account to stop the debits.

It is the instinct, and it is the trigger. In most agreements, blocking or diverting the debits is a breach of the performance guarantee, which converts a limited guarantee into full personal liability for the entire outstanding balance, immediately, and opens the route to a UCC lien on business assets, notices to your card processor, and where applicable a confession of judgment.

Owners who call a funder before the debit fails are in a materially different position from owners who call afterwards.

Read your agreement for the reconciliation clause

Most MCA agreements contain one, and it is the single most valuable paragraph in the document. Because the funder bought a percentage of receivables, the daily fixed amount is only an estimate of that percentage. If revenue falls, you generally have a contractual right to request reconciliation — to have the daily amount recalculated downward to match actual receipts.

The clause typically requires a written request and supporting documentation: bank statements, processor statements, sometimes a P&L. Send it in writing. Keep the proof of sending.

Funders do not advertise this, and a startling number of owners in distress never invoke a right they already hold. It will not solve a stacked position on its own, but it buys room and it establishes a paper trail of good faith that matters if this ends up in front of a judge.

The options, in order

1. Reconciliation. As above. Free, contractual, and first.

2. Direct restructuring. Funders would rather restructure than chase a closed business. Common outcomes are a reduced daily amount over a longer period, a short forbearance, or a discounted lump-sum payoff if you can raise one. Approach the funder before you default, with documentation.

3. Refinancing into something conventional. If the business is fundamentally sound and the MCA stack is the problem rather than the symptom, an SBA loan or a bank line at a real interest rate can retire the advances. This requires a business that a conventional lender will underwrite, which by the time most owners are reading this, it often is not. Worth an honest assessment rather than an assumption.

4. A business debt relief provider. Firms that negotiate with MCA funders on behalf of owners, typically for a fee. What they can do is negotiate reduced balances or restructured terms. What they cannot do is compel a funder to agree to anything, stop a lawsuit, or prevent a UCC filing. Programs can affect both business and personal credit, funders may continue collection and may sue, and outcomes vary by funder and by case.

5. An attorney. If there is a confession of judgment, a filed suit, a levy, or a question about whether the advance was in substance a disguised loan — an argument that has succeeded in some jurisdictions and reframes the whole matter — this is a lawyer’s problem, not a negotiator’s.

6. Winding down or bankruptcy. Chapter 11 (or Subchapter V, built for smaller businesses) can restructure under court protection. Where personal guarantees are extensive, personal bankruptcy may be part of the picture too. Unpleasant to think about, and occasionally the option that preserves the most.

The personal guarantee question

Ask it early and answer it precisely, because it determines whether this is a business problem or a family one.

Pull every agreement and find the guarantee clause in each. Note whether it is a full guarantee or a performance guarantee, and what converts one into the other. Note whether your spouse signed anything. If personal liability is broad across several advances, any strategy that treats the business in isolation is incomplete.

Payroll tax comes first

If the business is also behind on payroll taxes, that outranks every MCA in the queue. Trust fund taxes — the amounts withheld from employees — can be assessed personally against owners and officers through the Trust Fund Recovery Penalty, and the IRS has collection powers no funder has. Deal with that first, and see our guide to IRS payment plans.

What we can and cannot do here

Mannah Financial is a matching service. If your situation fits what one of our partner providers works with, we can introduce you to them and you decide whether to talk. We are not a funder, a negotiator, or a law firm, and we are paid by the provider if you choose one — which is a reason to read this page carefully and a reason we would rather tell you to read your reconciliation clause first, for free.