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Selling Assets to Pay Off Your Merchant Cash Advance
Merchant cash advances (MCAs) can provide much-needed working capital for small businesses. However, some business owners struggle to pay back their advances and accrue high fees and interest charges. If you find yourself in this situation, selling assets may help you pay off your MCA debt. This guide covers using asset sales to eliminate MCA balances, including:
Potential Assets to Sell
- Accounts receivable
- Inventory and equipment
- Real estate
- Vehicles
- Investments
Implications of Selling Assets
- Tax consequences
- Business disruption
- Future access to capital
Alternatives to Selling Assets
- Renegotiating MCA terms
- Debt consolidation loans
- Equity financing
- Bankruptcy
Key Takeaways
- Selling Assets Helps Eliminate MCA Debt
- Accounts Receivable Financing Provides Needed Cash
- Asset Sales Have Lasting Consequences
- Weigh All Options Before Selling Assets
Accounts Receivable Factoring
Accounts receivable factoring, also called invoice factoring, sells outstanding customer invoices to a lender at a discount. It quickly converts unpaid sales into usable cash.
Factoring provides funds secured by a business’s accounts receivable that can pay down merchant cash advances. Benefits of factoring to eliminate MCA debt include:
- Immediate capital infusion
- No disruption to operations
- Flexible credit standards
- Maintain ownership of assets
On the downside, factoring can be expensive, especially for distressed assets. Make sure to compare factoring costs against MCA interest rates.
Factoring Process
The factoring process includes:
- Selling outstanding invoices to factoring company
- Factoring company advances percentage of invoice value
- Customers pay invoices directly to factoring company
- Factoring company collects full invoice value
- Remaining invoice balance paid to business, less fees
Types of factoring arrangements include recourse and non-recourse agreements. Under recourse agreements, the business must buy back uncollected invoices. Non-recourse arrangements assign default risk to the factor.
Eligibility and Costs
To qualify for factoring, businesses typically need:
- 12 months of operations
- $10,000+ in monthly invoices
- Creditworthy customer base
Factoring costs include:
- Discount fees equal 1% – 5% of invoice value
- Interest rates from 1% – 2% per 10 days
- Administrative and servicing fees
Compare factoring costs to current MCA interest rates when deciding to sell receivables.
Using Factoring Proceeds to Pay Off Merchant Cash Advances
Assuming $100,000 in outstanding invoices and a 4% discount fee, factoring would generate $96,000 in proceeds. If the business owes $75,000 on a merchant cash advance with an effective annual interest rate of 90%, factoring would eliminate this high rate debt.
Selling excess invoices above MCA payoffs provides additional working capital. Businesses can use these extra proceeds to repay other debts, fund operations, or reinvest for growth.
Inventory Liquidation
For retailers and distributors, excess inventory is often an unused asset that ties up cash. Liquidating stock through clearance sales, auction sites, and liquidators converts inventory into cash to repay merchant cash advances.
Benefits of inventory liquidation to eliminate MCA debt include:
- Accelerates cash conversion cycle
- Frees up working capital
- Eliminates storage and handling costs
- Provides funds to repay debts
Liquidation Considerations Before liquidating inventory, businesses should carefully consider:
- Lost future sales from stock outs
- No longer offering full product selection
- Signaling distress to customers
Inventory liquidation works best for obsolete, slow moving, and excess stock. Avoid selling top-selling items.
Liquidation Process
Common inventory liquidation options include:
- Clearance sales – discount prices to sell through existing stock
- Online consumer auction sites – piecemeal sales direct to consumers
- Wholesale liquidators – selling in bulk lots at steep discounts
To maximize proceeds, businesses should compare multiple disposition channels. Ensure sufficient inventory controls to prevent giving away profitable stock.
Use of Proceeds
Assuming a 50% liquidation discount on $250,000 of excess inventory, the potential proceeds would equal $125,000. These funds could repay a significant portion of outstanding merchant cash advance debt.
Equipment and Vehicle Sales
Selling unneeded equipment, machinery, furniture, fixtures, and vehicles generates cash to repay merchant cash advances. Auction sites like eBay and Craigslist efficiently connect buyers and sellers.
Benefits include:
- Converts idle assets into cash
- Avoids storage and maintenance costs
- Does not impact core operations
Considerations around selling vital operating equipment include:
- Replacement costs may exceed sales proceeds
- Could signal distress to stakeholders
- Disrupts operations if production halted
Business owners should carefully evaluate each asset before listing for sale. Compare potential sale prices to replacement values and the operational impact.
Sales Process
To sell equipment and vehicles:
- Identify non-vital tangible assets
- Research fair market values
- List assets for sale on auction sites
- Compare bids to reserve prices
- Accept qualified offers
- Use proceeds to repay MCAs
Business Real Estate Sales
Selling owned commercial real estate eliminates merchant cash advance debt through unlocking property value. It also generates proceeds well above asset levels reported on business balance sheets.
Benefits include:
- Significant capital infusion
- Eliminates rent expense
- Frees up equity for growth
Downsides center on finding affordable replacement space if selling primary business properties.
Considerations When considering selling business real estate to repay MCA debt:
- Compare potential sales proceeds to relocation costs
- Factor in supply constraints in local commercial property markets
- Account for moving logistics and business disruption
Maximizing Value To maximize sales proceeds:
- Highlight special property features like zoning variances
- Emphasize stable tenancy for investment properties
- Make cosmetic improvements to raise perceived value
- Competitively market the listing and review all offers
Use of Funds
Based on current commercial real estate values, selling a fully owned $500,000 property could generate approximately $450,000 in sale proceeds after commissions and closing costs. These funds would pay off the majority of most MCA balances.
Unlocking Illiquid Business Investments
Beyond core operating assets, selling non-vital investments creates liquidity to repay merchant cash advances. Potential assets include:
- Public and private stock holdings
- LLC ownership interests
- Cryptocurrencies
- Fine art and collectibles
- Patents and intellectual property
Benefits of Selling Investments Divesting non-core investments to pay down debt provides:
- Immediate cash infusion
- Frees up capital for best uses
- Eliminates portfolio concentration risk
- Sheds underperforming positions
Considerations Before liquidating business investments:
- Analyze tax impact of realized gains
- Ensure clear title to asset holdings
- Research appropriate sale channels
- Set minimum acceptable price levels
Process Follow these key steps when selling investments to repay MCA debt:
- Identify underperforming and non-essential assets
- Select appropriate sale mechanism
- Market investments competitively
- Vet and negotiate offers
- Close sale with reputable buyer
- Use proceeds to eliminate high rate debt
Outcomes
With extensive due diligence and a competitive process, selling ancillary investments often generates significant proceeds to repay merchant cash advances. As examples:
- Private business equity sale: $250,000
- Long-held public stocks: $100,000
- Domain names: $25,000
Tax Implications
A primary consideration with selling assets is the potential tax liability from realized gains. Appreciated property held longer than one year qualifies for preferential long-term capital gains tax treatment. This subjects proceeds to a top rate of 20% at the federal level.
Depreciated property and short-term holdings face ordinary income tax rates up to 37%. State and local taxes also apply in most jurisdictions.
Strategies to minimize taxes on asset sales include:
- Offset gains with other realized losses
- Manage tax lot accounting method
- Consider Section 1031 exchanges
- Time sales to straddle tax years
- Harvest gains during low revenue years
Work closely with a tax professional to reduce tax obligations when selling assets to repay merchant cash advances.
Business Disruption
Selling vital operating assets risks disrupting core business functions. For example, liquidating the inventory of a distribution company could prevent order fulfillment. Removing essential equipment from a manufacturer may halt production.
To avoid business instability when selling assets to repay MCA debt:
- Carefully evaluate each asset before listing for sale
- Prioritize non-essential tangible property
- Stage asset sales over time
- Reinvest some proceeds into replacement equipment
With planning, businesses can raise significant capital through asset sales without impeding daily operations.
Future Access to Growth Capital
An additional risk of asset sales is reduced collateral value for future financing. Banks and alternative lenders secure loans against company property like real estate, inventory, equipment, and investments. Removing these capitalized assets from the borrowing base may inhibit future access to credit.
Two exceptions include accounts receivable financing and refinancing sold real estate. Ongoing receivables replenish factored balances. Commercial properties often appreciate faster than amortizing loans.
Still, business owners should view asset sales as a last option given the negative impact on future financing options.
Alternatives to Selling Assets
Before liquidating property to repay merchant cash advances, business owners have several alternatives to consider:
Renegotiate MCA Terms
Renegotiating merchant cash advance agreements may provide options beyond selling assets. Possibilities include:
- Extended repayment term at lower payments
- Interest rate reduction
- Lower fixed daily payments
- Interest-only period
The success of renegotiation depends on the lender and existing agreement terms. Dealing with funding companies directly provides more flexibility than selling MCA balances to third-party collectors.
Consolidation Loans
Debt consolidation combines multiple loans into a single facility to simplify payments. Consolidating merchant cash advances into a term loan sets fixed repayment schedules with lower interest rates.
Benefits include:
- Single monthly payment
- Lower interest charges
- Payoff flexibility
- Additional funds possible
Banks typically don’t offer consolidation loans to struggling businesses. Alternative options like private lenders, 401k business financing, and home equity loans provide viable alternatives.
Equity Financing
Bringing in an equity investor to pay off merchant cash advance debt avoids asset sales. Equity financing routes repayment through sharing future business profits. This preserves full ownership and control of property.
Forms of equity financing include:
- Venture capital funding
- Angel investor capital
- Private equity investment
- Crowdfunding
This higher risk capital expects outsized returns in exchange for repaying debts and funding growth.
Bankruptcy Protection
As a last resort, formal business bankruptcy may provide an alternative to selling assets. Chapter 11 filings let companies restructure debts under court supervision. This stops collections and can discharge portions of balances owed.
Downsides of bankruptcy include:
- Legal and administrative costs
- Damaged business reputations
- Limited access to capital
- Potential asset seizures
- Struggling post-bankruptcy
Speak to an experienced bankruptcy lawyer before considering this complex option.
Key Takeaways
- Selling assets provides capital to repay merchant cash advances quickly
- Liquidating accounts receivable, inventory, equipment, real estate, vehicles, and investments offer options
- Understand tax implications and business disruption risks before selling assets
- Alternatives like renegotiating MCA terms, consolidation loans, and equity financing exist
- Asset sales negatively impact future financing options and should be a last resort
Selling vital company property has lasting implications for small businesses. While asset sales generate funds to repay merchant cash advances, business owners risk hampering future growth and stability. Before liquidating accounts receivable, inventory, equipment, real estate, vehicles, or investments, carefully weigh all options and consequences.