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Merchant Cash Advance (MCA) Loan Defaults are a Big Problem for Small Business

Small businesses often face financial challenges that lead them to seek alternative funding solutions. Merchant Cash Advance loans have gained popularity in recent years as a quick and accessible source of capital for businesses in need. However, the seemingly convenient nature of MCA loans comes with a heavy price tag that can plunge a business into a downward cashflow spiral, often culminating in the need for financial restructuring through Chapter 11 to break free.

The Expensive Nature of MCA Loans

Merchant Cash Advance loans operate on the premise of advancing a lump sum amount to a business in exchange for a percentage of daily credit card sales, plus fees. While this model allows for flexibility in repayment, it also comes with exorbitant costs that can significantly impact a business's bottom line.

In many cases, the cost of an MCA is expressed through a factor rate, which can range from 1.2 to 1.5 or even higher. When applied to the borrowed amount, this rate represents the total repayment amount. Unlike traditional loans with fixed interest rates, the factor rate on MCA loans doesn't decrease with time, making them an expensive financing option over the long term.

The Downward Cashflow Spiral

One of the critical issues with MCA loans is the daily or weekly repayments tied to credit card sales. While this structure may appear manageable initially, it can quickly turn into a cashflow nightmare. The unpredictable nature of sales, combined with the fixed daily or weekly withdrawals, can strain a business's cash reserves.

As businesses struggle to meet these high repayments, they may find themselves in need of additional funding, perpetuating a cycle of borrowing that leads to ever-increasing costs. This downward spiral can stifle growth, hinder operational efficiency, and jeopardize the very existence of the business.

MCA Loan Defaults

When an MCA loan default happens, such as a missed payment, MCA lenders can be very aggressive in their collection efforts. Many MCA loans are controversially structured as a sale of future receipts. As a result, when a default occurs, one of the tactics the lender might take is to issue payment demands to the business’s credit card processor or customers. Few businesses can survive such an attack. Instead of throwing in the towel, many owners choose to take back control with the help of an experienced Chapter 11 attorney.

Chapter 11 Protection

Whether needed to stop aggressive collection actions, or simply to break free from the predatory lending cycle, Chapter 11 can provide protection, relief, and an opportunity to right size a company’s debt. Chapter 11 bankruptcy allows a business to reorganize and restructure its debts while continuing operations. MCA loans are often unsecured (despite what the documents might imply), meaning they are subject to being wiped out, and MCA lenders typically prefer to avoid the scrutiny and oversight of bankruptcy court.

Subchapter V is Especially Effective for Dealing with MCA Loans

Subchapter V went into effect in 2020 as part of the Small Business Restructuring Act. In connection with the CARES Act to address Covid-19 pandemic financial distress, Congress increased the debt limit for Subchapter V eligibility to $7.5 million. Businesses that qualify for Subchapter V can right-size debt in a streamlined way that often takes about 8 weeks from filing to Plan approval. Much of the cost and uncertainty of traditional Chapter 11 is eliminated. Perhaps most importantly, there is no “absolute priority rule” in Subchapter V, so business owners can retain ownership and control regardless of how much unsecured debt the business can repay.


While merchant cash advance loans may seem like a lifeline for cash-strapped businesses, their high costs and potential to lead to insolvency make them a risky proposition. Entrepreneurs should weigh the costs and benefits of MCA financing against alternative options, such as traditional bank loans, lines of credit, or small business administration (SBA) loans. While these alternatives may require more time and effort to secure, they often offer lower interest rates and more favorable terms, ultimately reducing the risk of financial distress and bankruptcy. Owners of businesses struggling under the weight of MCA loans should consult a restructuring attorney to explore options.

EmergeLaw, PLC - Nashville Chapter 11 Attorneys

About EmergeLaw, PLC

EmergeLaw is a boutique law firm that represents small and middle market businesses and their owners in debt workouts, Chapter 11 reorganizations, Subchapter V restructurings, and other proceedings to help them deleverage and reposition for future success. Applying decades of experience and a specialized toolkit, our Nashville business restructuring attorneys help entrepreneurs, family businesses, private equity funded companies, and real estate investors maximize value in ways that many clients find unexpectedly efficient and effective.


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