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What happens when you cannot pay an MCA?

On Behalf of | Mar 5, 2024 | Merchant Cash Advances

As a small business owner, you may have found yourself in a situation where you needed quick access to capital to cover business expenses or take advantage of new opportunities. You may have considered a merchant cash advance (MCA) in such cases. A merchant cash advance is a type of financing where a lender provides a business with a lump sum of money in exchange for a percentage of the business’s future credit card or debit card sales.

Unfortunately, business sales are not always stable or predictable. If your business cannot keep up with the scheduled MCA payments, you must strategize to prevent defaulting.

Negotiate a payment plan with the lender

If you are having trouble repaying a merchant cash advance, it is essential to communicate with the lender as soon as possible to discuss your options. The lender may be willing to work with you to find a solution, such as setting up a payment plan or temporary forbearance agreement.

Refinance your MCA

Refinancing options may be more limited because MCAs are not traditional loans and are instead structured as advances on future sales. Traditional lenders may be hesitant to provide refinancing for MCA debt due to the higher risk associated with businesses that have needed such financing in the first place.

Refinancing an MCA can also lead to a debt cycle as it may involve paying interest on the original advance’s total borrowing cost, including fees. This can result in interest accruing on top of interest, making it more challenging to become debt-free.

Seek legal guidance and protection

Legal professionals who specialize in financial matters can be invaluable allies. They can help you understand your obligations under the MCA agreement, negotiate with your MCA lender and provide guidance on managing debt. A lawyer can also determine if any of the collection practices you are facing cross legal lines and advise you on how to respond.