When a Business Starts Borrowing Like It’s Running Out of Options: Merchant Cash Advances and Other Signs of Distress
- May 20
- 4 min read
What high-cost short-term borrowing often signals about a company’s financial position
By Hannah Berny, Business Bankruptcy & Restructuring Partner with EmergeLaw, PLC, Nashville, Tennessee
Merchant cash advances and other high-cost short-term business loans rarely appear in healthy capital structures.
In our experience, businesses usually turn to MCA debt after more conventional financing options have narrowed, liquidity pressure has intensified, and management is trying to create time in an increasingly constrained situation. What begins as an effort to stabilize cash flow can quickly evolve into something much larger: a business financing itself through extraordinarily expensive short-term debt while underlying structural problems continue to worsen.
That is why the appearance of MCA debt should matter not only to business owners, but also to the lawyers, accountants, bankers, and advisors around them. In many cases, the existence of this type of financing is not simply a borrowing decision. It is an early warning sign that the business may need a broader restructuring strategy before options narrow further.
MCA Debt Often Signals a Much Larger Problem
Businesses with stable banking relationships and manageable leverage rarely rely heavily on merchant cash advances. The cost is usually too aggressive, the repayment structures too restrictive, and the operational burden too disruptive.
By the time MCA financing enters the picture, more traditional options have often already been exhausted or materially constrained. Existing lines of credit may be fully drawn. Vendor pressure may be building. Senior lenders may be increasingly cautious. Cash flow may no longer support the company’s existing debt structure.
In many cases, MCA debt functions less like ordinary business financing and more like a business operating on credit cards. It is often a financing source of last resort: expensive to carry, operationally disruptive, and increasingly difficult to unwind once a business becomes dependent on it.
That distinction matters because MCA debt often appears at the point where ordinary liquidity pressure is beginning to evolve into a genuine restructuring problem.
Why High-Cost Short-Term Financing Escalates Quickly
One of the reasons MCA debt can become so dangerous is that it initially appears to solve the immediate issue.
Payroll gets funded. Vendors get paid. Operations continue.
But in many cases, high-cost short-term financing does not replace existing obligations, it layers on top of them. Senior secured debt remains in place. Existing trade debt continues to grow. Cash flow becomes increasingly constrained by daily or weekly ACH withdrawals that consume operating liquidity at a pace many businesses cannot sustain for long.
At some point, the financing is no longer supporting the business. The business is supporting the financing.
That shift is often subtle at first, but once it occurs, deterioration tends to accelerate quickly. Management becomes increasingly focused on surviving the next week or month rather than addressing the underlying capital structure. Additional high-cost financing may be layered on top of existing MCA obligations. Vendor relationships deteriorate. Existing lenders become more defensive. Options narrow.
For advisors working closely with privately held businesses, this is often the critical inflection point.
The Conversation Advisors Should Be Having Earlier
When lawyers, accountants, bankers, and financial professionals learn that a client has taken on MCA debt or similar high-interest short-term financing, that should trigger a broader restructuring discussion.
Not because failure is inevitable. It is not. Some businesses successfully refinance these obligations, stabilize operations, or navigate temporary disruptions before the situation deteriorates further.
But the presence of MCA debt often means the business is operating with very little margin for error. Liquidity may already be constrained. Conventional financing options may already be limited. Creditor leverage may already be shifting.
At that stage, the most important questions are usually no longer operational questions. They are structural ones:
Is the current debt load realistically serviceable?
Is the capital structure workable?
Is management buying time, or creating a viable path forward?
What happens if revenue softens further?
What leverage still exists with lenders and creditors?
What options remain available before the situation becomes significantly more constrained?
Those conversations are substantially more productive before liquidity collapses, before lender enforcement accelerates, and before management loses meaningful flexibility.
Courts Are Increasingly Looking Beyond the Labels
Another important development is that bankruptcy courts across the country are increasingly willing to examine the economic reality of MCA arrangements rather than simply accepting how the transactions are labeled.
Issues involving recharacterization, usury, lien priority disputes, avoidance actions, and enforceability are now being litigated with increasing frequency in Chapter 11 cases involving MCA debt. Courts have shown growing skepticism toward structures presented as “purchases” of future receivables where the practical effect resembles high-interest lending.
That does not mean every MCA arrangement is improper or unenforceable. But it reinforces a broader point that many restructuring professionals already recognize: these financing structures frequently appear in businesses operating under significant financial strain.
Buying Time Only Works If There Is a Plan
Not every business that takes on MCA debt requires a Chapter 11 filing or formal restructuring process. Some businesses recover. Some refinance. Some successfully navigate temporary liquidity disruptions.
But in many cases, high-cost short-term borrowing is not a long-term solution. It is a signal that the broader financial structure deserves immediate and careful evaluation.
The question is not simply whether the business can survive another week or another month. The more important question is whether the company’s financial structure gives it a realistic path forward.
Hannah Berny is a partner with EmergeLaw, PLC in Nashville, Tennessee, where her practice focuses on business restructuring, Chapter 11, Subchapter V, loan workouts, and financial distress situations involving privately held companies. She represents businesses and owners facing lender pressure, cash flow crises, overleveraged capital structures, and complex debt problems. Hannah frequently advises companies and their professional advisors on restructuring strategy before liquidity events become existential crises.
This article is for general information only and does not constitute legal advice. Reading this post does not create an attorney-client relationship.