Merchant cash advances (MCAs) have become a popular source of business financing for small business owners who struggle to qualify for traditional bank loans. While MCAs can provide fast access to working capital, they often come with high factor rates, short repayment periods, and terms that can quickly drain your cash flow.
If you’re wondering how to get out of merchant cash advances, you’re not alone—and the good news is that there are steps you can take to regain control of your business’s finances.
Key Takeaways
Merchant cash advances can severely impact a business’s cash flow due to high repayment costs and aggressive collection practices, making it crucial to understand the terms before signing any agreement.
Refinancing or consolidating MCA debt with traditional or alternative business financing can be a viable path toward regaining financial control, especially for businesses struggling with daily or weekly repayment obligations.
Legal and financial professionals can help identify potentially unlawful lending practices and negotiate better repayment terms or settlements with MCA providers.
What Is a Merchant Cash Advance?
A merchant cash advance is not a traditional loan. Instead of lending money based on credit scores and interest rates, an MCA company offers a lump sum of cash upfront in exchange for a portion of your future credit card sales or overall incoming sales. You agree to repay this advance through fixed withdrawals or a set percentage of your daily credit card transactions or debit card payments until the debt is satisfied.
Because repayment is tied to your credit card receipts or monthly revenue, payments can fluctuate—or remain fixed—depending on the agreement. But unlike conventional loans, MCAs often carry significantly higher total borrowing costs, putting pressure on your business bank account and future financial stability.
Why Merchant Cash Advances Can Be Problematic
Small businesses turn to merchant cash advances when traditional funding options like SBA loans, business credit cards, or bank loans are unavailable due to bad credit or low annual revenue. However, the merchant cash advance rates can be far higher than those of traditional loans. Since MCA repayments are drawn from credit card sales or bank account deposits, they can disrupt your business’s ability to maintain healthy cash flow.
Other challenges include:
Lack of flexible payments
No credit reporting to credit bureaus
No transparency around repayment schedules or factor rates
Legal loopholes that allow MCA companies to guarantee repayment through aggressive tactics
Understanding Factor Rates and Fees
When considering a merchant cash advance, it’s crucial for business owners to understand how factor rates and fees impact the total cost of borrowing. Unlike traditional loans that use interest rates, what do merchant cash advances do? They rely on a factor rate to determine how much you’ll repay. Factor rates typically range from 1.1 to 1.5, depending on the merchant cash advance company and your business’s creditworthiness.
To calculate your total repayment, simply multiply the advance amount by the factor rate. For example, if you receive a $50,000 cash advance with a factor rate of 1.4, you’ll be required to repay $70,000 in total. This amount is fixed, regardless of how quickly you pay it back. In addition to the factor rate, some merchant cash advance agreements include extra charges such as origination or administrative fees, which can further increase your total borrowing cost.
It’s essential to carefully review your merchant cash advance agreement to identify all fees and understand exactly what you’re committing to. For a clearer comparison with other business financing options, you can convert the factor rate into an annual percentage rate (APR).
This helps you see how the cost of a merchant cash advance stacks up against traditional loans or other cash advances, ensuring you make the best financial decision for your business.
The Importance of Bank Statements
Bank statements play a vital role in the merchant cash advance process, both during application and repayment. Lenders use your business’s bank statements to verify income, assess cash flow, and determine whether your business qualifies for a cash advance. Accurate and up-to-date bank statements provide a clear picture of your average monthly sales and overall financial health, which can influence the terms and approval of your merchant cash advance.
Business owners should be prepared to submit several months’ worth of bank statements, as well as other supporting documents like tax returns or financial statements, to demonstrate financial stability. These records help the merchant cash advance company evaluate your ability to handle fixed withdrawals or daily repayments without jeopardizing your cash flow.
Even after approval, lenders may continue to monitor your bank statements to ensure your business maintains the necessary revenue to meet repayment obligations. Keeping your bank statements organized and accurate not only streamlines the application process but also helps protect your business’s financial standing throughout the life of your merchant cash advance.
How to Get Out of Merchant Cash Advances
If you’re caught in a cycle of debt, here are several strategies that can help you get out of a merchant cash advance:
1. Consolidate or Refinance Your Debt
You may be able to replace your MCA with a lower-cost business loan from a bank, credit union, or online lender. This allows you to consolidate your payments into a single loan agreement with more manageable terms and possibly a lower traditional interest rate. For businesses with less-than-perfect credit, some lenders offer small business loans tailored to high-risk profiles.
2. Negotiate with Your MCA Company
Some merchant cash advance companies are open to restructuring the repayment terms. You may be able to reduce your fixed payments, extend the repayment period, or settle for a reduced fixed amount in exchange for a lump sum payment. Always get any new agreement in writing.
3. Use Invoice Factoring or a Business Line of Credit
If you have unpaid invoices or consistent monthly revenue, you can leverage invoice factoring or apply for a business line of credit. These options provide quick access to cash without selling off future sales.
4. Seek Legal Help
Some MCA agreements may violate lending laws or use misleading terms. Consulting a financial advisor or attorney who specializes in MCA debt relief can help protect your financial protection and challenge unfair agreements.
5. Cut Unnecessary Costs and Increase Revenue
Revisit your bank statements and cut any unnecessary expenses. Find ways to boost sales through promotions, new credit card purchases, or targeting retail businesses and customers who pay with debit and credit card. More future income means faster repayment—or better qualification for a lower-interest product.
Alternatives to Merchant Cash Advances
To avoid falling into the MCA trap again, consider:
SBA loans for long-term, low-rate funding
Traditional loans from banks or credit unions
Online lenders offering short-term business loans
Business credit cards for everyday expenses
Other business loans based on monthly or annual revenue
Final Thoughts
While a merchant cash advance may offer quick access to capital, the long-term cost can be damaging to your business. Knowing how to get out of merchant cash advances requires careful planning, negotiation, and possibly outside help.
By exploring refinancing options, negotiating with your lender, or pursuing better alternatives, business owners can restore their cash flow and build toward a more stable financial future.
Contact SB Legal for advice regarding MCA debt. We are ready to help you with a free initial conversation!
Frequently Asked Questions
What happens if I stop making payments on a merchant cash advance?
If you stop making payments, the MCA company may take legal action, including freezing your bank accounts, filing a lawsuit, or using a confession of judgment (if applicable in your state) to expedite the process. This can severely damage your business’s ability to operate.
Can a merchant cash advance affect my ability to get other types of funding?
Yes. Lenders often view an active MCA as a red flag, especially if it has high daily deductions or if your revenue is already stretched thin. It can limit your access to bank loans or credit lines until the MCA is paid off or refinanced.
How can I tell if an MCA agreement is predatory or unfair?
Predatory MCA agreements typically include unclear repayment terms, extremely high factor rates, or require daily payments that are disproportionate to your revenue. If the contract lacks transparency or heavily favors the lender, seek a legal review before proceeding.