MCA Business Debt Settlement: An Overview

Merchant cash advance (MCA) loans have become an increasingly popular way for small businesses to access quick capital. However, the high rates and aggressive collection tactics used by some MCA lenders can trap business owners in difficult debt cycles. If your business took out an MCA but is now struggling to keep up with payments, debt settlement may be an option.

How Do MCA Loans Work?

An MCA loan provides a business with a lump sum of capital in exchange for a percentage of future credit card and/or debit card sales over a set period of time. This allows business owners fast access to funds without requiring traditional qualifications like good business or personal credit.

• Key features of MCA loans:
  • Based on future sales, not credit score
  • Approval process is quicker than bank loans
  • Payments fluctuate based on daily credit card sales
  • Average APR of 60-200%

Unlike traditional small business loans, MCA payment amounts rise and fall each day depending on the volume of credit and debit card transactions. This variable structure allows MCA companies to avoid usury laws that cap interest rates. While convenient in the short-term, it can create longer-term hardship for merchants if sales decline.

The Risks of MCA Loans

While MCAs pose an attractive financing option on the surface, they come with a unique set of risks:

• High rates and fees – The equivalent APR on an MCA loan generally ranges from 60% to 200% when accounting for all fees. This is drastically higher than even credit cards or alternative online lenders.
• Aggressive collections – Some MCA lenders use aggressive tactics like remotely accessing merchant bank accounts or threatening to contact vendors/customers about debts owed.
• Personal liability – Business owners often personally guarantee MCA loans, meaning their personal assets are at risk for default.
• Daily repayment volatility – Fluctuations in credit card sales lead to inconsistent daily payments that are hard to budget for.

These structural elements can quickly spiral a struggling business into unmanageable debt despite the initial appeal of fast and easy capital.

When To Consider Debt Settlement

If you’ve realized your business’ MCA loan is unaffordable over the long-term, debt settlement may be the most viable path forward.Debt settlement involves negotiating directly with creditors to settle accounts for less than what is owed. It is best suited for borrowers who have experienced an income disruption and can no longer afford minimum payments. Common situations where businesses pursue debt settlement include:

• Natural disasters
• Loss of major client(s)
• Industry declines
• Owner/employee health issues
• Family emergencies

Settling MCA debt typically saves between 25% to 75% off the full balance. Most MCA lenders will entertain settlement offers between $0.10 to $0.50 per outstanding dollar depending on your specific situation.

The Debt Settlement Process

If you move forward with settlement, here is a general overview of what you can expect:

1. Stop Making Payments

As soon as you decide to settle your MCA debt, stop making daily payments. This is an important first step because it shows creditors you cannot afford the original repayment terms.

• Note: Your accounts will likely go into default but this is expected as part of the process.

2. Open Separate Bank Account

Next, open a new business checking account to set aside lump sum settlement funds. Having a separate account prevents creditors from accessing your primary operating funds.

3. Negotiate With Creditors

With the help of a settlement firm, you will start negotiating directly with your MCA lender(s). The first settlement offers typically range from 10% to 30% of the total balance.

• Be prepared for back and forth before reaching an agreement.

4. Settle Debt

Once accepted, you will pay the agreed-upon lump sum from your separate account to satisfy the debt. Make sure to get any settlement deal in writing before paying.

Key Benefits

Pursuing settlement provides multiple advantages compared to other debt relief options:

• Avoids bankruptcy – Settling allows you to resolve debts out-of-court and avoid public bankruptcy records.
• Cash flow management – Making a one-time lump sum payment is often more affordable compared to high daily MCA payments that fluctuate.
• Frees up capital – Removing the debt obligation preserves cash flow to reinvest in business operations.
• Prevents litigation – Structured settlements protect your assets and prevent MCA lenders from suing your business directly.

Finding The Right Settlement Company

While it is possible to negotiate debt yourself, using a settlement firm maximizes success. Choose an experienced company that:

• Has settled MCA loans before
• Charges fees contingent on securing settlements
• Has relationships with multiple MCA lenders
• Provides customer service throughout
• Can cite case studies/reviews from past clients

This level of expertise is key to mitigating the complexity of dealing with aggressive MCA creditors directly.

What To Expect From Your Settlement Company

Once retained, a settlement company will conduct an in-depth review of your unique situation, including:

• Debt Analysis – Review all outstanding MCA loans, fees owed, original repayment terms, etc.
• Financial Analysis – Evaluate your updated budget, projected cash flow, and settlement fund availability.
• Account Management – Take over communication with creditors on your behalf.
• Settlement Negotiation – Leverage past experience and industry relationships to put forward competitive offers.
• Deal Finalization – Provide guidance on finalizing/documenting any agreed-upon settlements.

Having an advocate to handle these elements alleviates the burden and uncertainty of negotiating your business’ complex debts independently.

Can Any Business Settle Its MCA Debt?

While most businesses are candidates for debt settlement, the likelihood of securing settlements depends on:

• Your specific financials – Budget, profit margins, credit, and projected cash flow impact options.
• Industry conditions – Whether your sector is stable, declining, saturated, etc.
• Type/size of creditors – Settlement success varies across different MCA lenders.

In general, companies with less than $500k in total MCA debt and at least $10-15k in available lump sum settlement funds tend to see the highest settlement success rates.

Other Debt Relief Alternatives

If debt settlement does not appear to be the right solution, here are two other common ways businesses address overwhelming MCA loans:

Debt Consolidation

Debt consolidation involves taking out a new loan to pay off multiple existing debts. While this can reduce payments, it means increased total interest and fees long-term.

Chapter 7 or Chapter 11 Bankruptcy

Filing for bankruptcy provides protections from collections/lawsuits. However, it leaves significant public records that can undermine future access to business financing.For most merchants, settlement provides a middle ground between these options – resolving accounts for less without the drawbacks of consolidation loans or bankruptcy.

What Settlement Could Save Your Business

To better understand the potential savings from settling your MCA loan, let’s walk through a hypothetical example:

• Original MCA Loan – $200,000
• Total Owed – $350,000 (with fees)
• Monthly Payment – $7,500
• Term Remaining – 2 years

Based on these terms, you would expect to pay $180,000 more over the next 24 months until the MCA is repaid in full.However, by settling the debt at 40% of the outstanding balance, you could resolve the $350,000 obligation for a one-time payment of $140,000.This results in $40,000 in savings versus continuing with monthly payments for 2 more years. And more importantly, it eliminates the constant cash flow burden of keeping up with variable daily payments.

Ready To Explore Settlement?

If unrelenting MCA debts are jeopardizing your business, the financial experts at Delancey Street have the experience to negotiate settlements on your behalf. To find out if debt settlement is right for your situation, schedule a free consultation today.