Starting a business often means taking risks. For some small business owners, one of those risks includes using a merchant cash advance for startups (MCA) to cover immediate funding needs, as these advances are often marketed as a source of quick capital for startups.
While this type of business cash advance may seem like a quick solution to cash flow problems, many entrepreneurs soon realize that the consequences can be devastating.
If you’re a business owner struggling under the weight of an MCA, bankruptcy might be a viable lifeline. Let’s explore the negative side of merchant cash advances and why they may do more harm than good — especially for startups.
Key Takeaways
Merchant cash advances (MCAs) can quickly spiral into unmanageable debt due to high repayment costs, lack of regulation, and unpredictable terms tied to daily credit card sales, making them especially risky for startups.
Bankruptcy may be the only viable option for relief when a business becomes overwhelmed by multiple MCA obligations, offering a path to eliminate or restructure debt and preserve business continuity.
Safer funding options like traditional business loans, SBA loans, and business credit building programs offer more sustainable and transparent solutions for long-term growth compared to MCAs. MCAs are just one of several financial products available to startups, but not all financial products are equally safe or transparent.
How Merchant Cash Advances Work
A merchant cash advance is a unique financing solution that gives businesses access to a lump sum of immediate capital in exchange for a portion of their future credit card sales. Unlike traditional loans, merchant cash advances are structured around your business’s daily credit card sales, making them especially appealing to companies with steady transaction volume, such as restaurants or retail stores.
The process begins when a business submits its credit card processing statements to a merchant cash advance provider. These statements help the provider assess your average daily credit card sales and determine the funding amount you qualify for.
Once approved, you receive a lump sum cash advance, which can be used to cover urgent expenses like payroll, inventory, or other operational needs.
Repayment is straightforward but relentless: the merchant cash advance company automatically deducts a fixed percentage from your daily credit card sales until the advance, plus fees, is fully repaid. This means that repayment is directly tied to your business’s cash flow—if sales are high, you pay more that day; if sales are low, you pay less.
For businesses with less than perfect credit, merchant cash advances can seem like an accessible way to secure immediate capital without the hurdles of traditional financing.
The Benefits of Merchant Cash Advances
Merchant cash advances offer several advantages that make them attractive to small business owners who are looking for quick funding options. One of the biggest benefits is the ability to receive immediate funding, often within just a few days, helping businesses address urgent cash flow needs or seize time-sensitive opportunities.
Because repayment is based on a percentage of your credit card sales, the process is inherently flexible: you pay more when business is booming and less when sales slow down, which can help ease the pressure on your cash flow.
Another key benefit is that merchant cash advances typically do not require collateral, making them accessible to businesses that may not have significant assets to pledge. This, combined with the fact that approval is often based on your credit card sales volume rather than your credit score, means that even businesses with less than perfect credit can qualify.
For companies facing unexpected expenses, like equipment repairs or launching a new marketing campaign, a merchant cash advance can provide the cash advance needed to keep operations running smoothly.
Overall, merchant cash advances can be a practical option for businesses with strong credit card sales that need fast, flexible access to capital without the red tape of traditional financing.
The Dark Side of Merchant Cash Advances
Despite the quick approval process and immediate capital, most merchant cash advances come with aggressive repayment terms, astronomical annual percentage rates (APRs), and almost zero transparency. While MCAs are often marketed as offering flexible payments that adjust with your revenue, in reality, this flexibility is overshadowed by aggressive collections that can strain your cash flow. Here’s how they can damage your business:
1. Sky-High Repayment Costs
Many merchant cash advance companies deduct a large portion of your daily credit card sales, often leaving you with little to no room to cover business operations like purchasing inventory, payroll, or rent. The more successful your business, the more they take — meaning high credit card sales don’t help you recover.
2. No End in Sight
Since repayment is based on future sales, and there’s no fixed repayment period, the costs can drag on indefinitely. If your sales drop, you’re still on the hook — and you might be forced to take out another MCA to stay afloat, digging a deeper hole.
3. Business Bank Account Drains
With fixed payments or automatic withdrawals from your bank account, your cash flow can quickly dry up. If your business performance fluctuates or takes a hit, you’re left vulnerable, often with personal guarantees or personal liability attached.
4. Not Regulated Like Traditional Loans
Merchant cash advance providers are not regulated the way banks or traditional lenders are. There are no clear business loan rates, and terms are often buried in confusing contracts. Some lending firms even partner with multiple lenders, making it nearly impossible to negotiate or settle.
Why Bankruptcy May Be the Only Escape
For some businesses, bankruptcy becomes the only realistic option to escape an MCA trap. While it’s not an easy decision, filing for Chapter 7 or Chapter 11 can:
Halt collections from aggressive financing companies
Help restructure or eliminate debt from multiple MCAs
Protect company assets and potentially preserve business lines
End the cycle of borrowing to repay previous cash advances
If your business credit card and credit card processing statements are being weaponized against you, and you have existing loans or personal cash advances adding to the burden, bankruptcy can offer a fresh start.
The Safer Alternative: Traditional Loans and Credit Building
Before accepting a merchant cash advance, consider safer options such as:
Traditional business loans or a small business loan with reasonable credit score requirements
SBA loans with longer repayment periods
Business credit building programs
Lines of credit tied to good business credit
A traditional bank loan typically has a fixed payment structure, unlike the flexible, revenue-based repayment model of MCAs. Some MCAs advertise a lending firms guarantee of approval and funding within 24 to 48 hours, but this speed often comes with higher costs and stricter terms.
For example, MCAs may restrict your ability to encourage cash over credit card payments or prevent you from switching credit card processing companies during the repayment period to protect their interests.
Even if your credit history or business credit is limited, focusing on sustainable growth and responsible lending will help in the long term.
Final Thoughts
While a merchant cash advance for startups might promise immediate funding needs without a minimum credit score, it often leads to financial ruin. The predatory nature of many merchant cash advance providers, coupled with unrealistic fixed monthly payments and draining of your bank account, leaves many entrepreneurs regretting their decision.
If you’re drowning in MCA debt, bankruptcy might not just be a way out — it might be the only way to save your business and your sanity. Speak with a financial advisor or bankruptcy attorney to explore your options before your startup becomes another cautionary tale.
At SB Legal, we offer a free initial consultation. We are bankruptcy attorneys in San Diego and Los Angeles, ready to help you! Contact us today.
Frequently Asked Questions
Can I negotiate with an MCA provider to settle the debt before filing for bankruptcy?
Yes, you can attempt to negotiate a settlement or restructuring of your MCA debt. Some providers may agree to a reduced payoff amount or extended terms, especially if they see that bankruptcy is likely. However, many MCA contracts include aggressive collection clauses, and not all providers are open to negotiation, so results can vary widely.
How does having multiple MCAs affect my business credit and chances of getting traditional financing later?
Having multiple MCAs on record can significantly damage your business credit profile, especially if you miss payments or default. Traditional lenders may view this as a sign of financial instability, which can lower your chances of qualifying for business loans or lines of credit in the future.
Are there legal protections in place to help business owners who feel misled by MCA providers?
Legal protections for MCA borrowers are limited because MCAs are not considered traditional loans and often fall outside standard lending regulations. However, in some states, business owners may pursue legal action if they can prove deceptive practices, fraud, or violations of usury laws. Consulting with a business attorney experienced in MCA litigation is advisable if you believe your rights have been violated.