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Merchant cash advances allow businesses to receive an upfront sum of money in exchange for a percentage of future credit card sales. While this can provide much-needed capital, the high fees and rigid repayment structures often create an endless debt cycle. This article will examine merchant cash advance contracts in-depth, provide tips on avoiding them from the outset, and detail multiple strategies to exit them if already signed.

Understanding Merchant Cash Advance Contracts

Merchant cash advances are a form of business financing where a company receives money upfront in exchange for a fixed percentage of future credit card sales. Here are some key aspects of these contracts:

  • Advance Amount – This is the lump sum a business receives, often between $5,000-$500,000.
  • Fixed Daily Payment – The contract requires paying back a set amount from daily credit card sales, typically 10-20%.
  • No Time Limit – Repayments continue until the full advanced amount plus fees are repaid, which often takes 12-18 months.
  • High Fees – Interest rates are hidden but often equivalent to 60-200% APR when calculated.

This structure allows fast access to capital but locks businesses into rigid daily payments unaffected by seasonal changes or downturns. Failing to make the fixed payments triggers penalty fees and can result in the merchant cash advance company taking legal action or seizing assets.While easy to enter, the predatory terms make these exceptionally difficult to exit. However, with proper preparation, it is possible to break free of these toxic financing arrangements.

Avoiding Merchant Cash Advances From the Outset

The easiest way to escape merchant cash advances is never entering one in the first place. When capital is needed, several alternative financing options exist for small businesses:

  • Business Credit Cards – This debt is cheaper and more flexible than merchant cash advances. Interest rates are clearly stated, and minimum monthly payments are reasonable.
  • Business Term Loans – A lump sum is provided upfront and repaid in predictable installments over 6-60 months with set interest rates.
  • SBA Loans – For qualified applicants, SBA-backed financing offers long repayment periods of 10-25 years with competitive interest rates.
  • Crowdfunding – Platforms like Kickstarter allow customers to fund new products or projects directly. No set repayment is required if funding goals aren’t met.
  • Bootstrapping – Cutting costs, adding services, or finding creative ways to organically increase income streams can generate capital without taking on debt.
See also  How to Negotiate a Release of a UCC Lien in Merchant Cash Advance

Thoroughly researching all alternatives before considering merchant cash advances is vital. Seeking professional consulting to determine the best funding sources for a given business is also wise. With proper planning, these toxic financing arrangements can be avoided completely.

Refusing Automatic Repayments

If already locked into a merchant cash advance contract, the first step is regaining control of business accounts. These agreements allow the lending company to automatically withdraw the fixed daily payment amount from credit card sales.To halt this:

  • Switch processors – Changing credit card processing companies stops the previous processor’s access to the accounts.
  • Open new bank account – Funds from the new processor can go into a new checking account inaccessible to the merchant cash advance firm.
  • Review contract terms – The agreement may allow refusing automatic payments by sending written notice. If so, immediately notify them via certified mail.

Cutting off automated withdrawals prevents the merchant cash advance balance from forcibly increasing while alternate solutions are explored. However, reasonable repayments should continue to avoid breaching the contract terms.

Negotiating a Settlement

Once automatic repayments stop, the next step is attempting to settle for a lump sum that is less than the full outstanding amount. The merchant cash advance company has incentive to accept a smaller payout immediately rather than none if legal action is eventually required against a bankrupt business.When negotiating, key leverage points to emphasize are:

  • Inability to Repay – Demonstrate through financial statements and bank records that making the full payments is impossible at present.
  • Offer Percentage – Propose settling for a fixed percentage, often 30-50%, of the total owed. Cite difficulties other merchant cash advance recipients have had getting approved for more favorable terms.
  • Payment Plan – Offer to repay the reduced amount in predictable installments over 6-12 months. This provides them reliable income rather than an all-or-nothing proposition.
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Having a business lawyer review the contract and directly contact the merchant cash advance company markedly improves the probability of securing such a settlement. Even if negotiations fail, documenting good faith efforts to reach an agreement strengthens one‘s position if legal action occurs.

Filing for Bankruptcy

If unable to negotiate an acceptable settlement, declaring bankruptcy may be the only path forward:

  • Chapter 7 – Liquidates company assets to pay outstanding debts before dissolving the business.
  • Chapter 11 – Attempts financial reorganization rather than dissolution through an approved repayment plan.
  • Chapter 13 – Similarly restructures personal rather than business debts with court-ordered payment terms.

The legal complexity of navigating bankruptcy requires working with qualified business attorneys and financial advisors. They can objectively assess whether restructuring or dissolution better serves one’s situation.Be aware bankruptcy carries long-term consequences like damaged credit ratings and being personally liable for business debts. Weigh these outcomes carefully before pursuing this route.

Selling the Business

Another option is selling the financially distressed business through:

  • Asset Sale – Sells equipment, intellectual property, brand names, etc. Piecemeal asset sales rarely yield fair value.
  • Equity Sale – Sells full ownership stake to a new owner who assumes all liabilities. This is only feasible if substantial intrinsic value remains.
  • Third-Party Company – Specialized firms may buy out small businesses specifically to reform and resell them later at a higher price. While quick, only a small percentage of the fair market value is usually offered.

Thoroughly researching potential buyers, having accurate financial statements, and legally transferring titles/deeds is vital for this path. Consult experienced business brokers to facilitate the sale and maximize the value received. Sufficient proceeds can then repay outstanding merchant cash advances and other debts.

See also  How can I challenge the validity or enforceability of a UCC lien?

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