Be Careful with Merchant Cash Advances – Here’s What to Do if This Warning Comes Too Late

You may have heard that borrowing against tomorrow means stress for today. In few instances is that truer than in the case of the loans that are causing many small business owners to flounder financially – even two years after the onset of the COVID-19 pandemic. 

Here’s how merchant cash advance loans – and defaults – are hampering economic recovery for many Florida business owners:

The Boom in Merchant Cash Advances – and Defaults

The COVID-19 pandemic and the resulting financial fallout brought many businesses to their figurative knees. Companies of all sizes were severely impacted by both the financial crunch at every level of society and the labor shortage that resulted from sweeping illness, lockdowns, and more. As a result, many people who owned and operated smaller businesses without massive capital to spare were left scrambling for a way to pay bills and employees. 

This has resulted in a boom in both borrowing and lending. Businesses have been forced to consider credit as a way to keep doors open and employees on the payroll. However, not all creditors are created equal. 

One of the more predatory types of lending available to small businesses is merchant cash advance loans. These loans are essentially borrowed against future sales revenue that a company hopes to make. This is already a precarious situation, given the fact that future sales are never guaranteed. 

During the coronavirus pandemic, though? It has become a disastrous situation for many small business owners. 

It stands to reason why so many companies were forced to choose a merchant cash advance loan during these uncertain and sometimes desperate times. It also makes sense that this uncertainty meant that not enough revenue was coming in to cover the repayment of these loans – and defaults resulted. With an uptick in merchant cash advance defaults, it is important to know exactly what this means for business owners. 

What Happens in the Event of a Merchant Cash Advance Default?

One of the reasons that many financial experts advise avoiding merchant cash advance loans altogether is the terms of these loans. These terms are often unfavorable for small business owners. They typically include a very unforgiving repayment schedule that does not allow for missing even a single payment. Even being late on a payment can result in default. 

Default essentially means that a person or company is no longer in compliance with the terms of the loan that they agreed to. What happens in the event of a merchant cash advance default? If your company cannot remit payment promptly, you may find yourself or a business representative sued by the lender for more than the amount you owe. Eventually, you may even see your company’s assets seized in an effort to recover the cost of the unpaid loan.

Avoiding a Merchant Cash Advance Default

The best way to keep yourself out of trouble when it comes to a merchant cash advance default is not to use these types of loans in the first place. While it may feel like you do not have other options during times of financial stress, it is important to remember that there are always other choices. 

The most obvious choice is to reduce staff or cut other expenses. For some businesses, this was not done throughout the pandemic in an effort to keep struggling parents and providers employed. However, many businesses have had to make this difficult choice in recent months due to ongoing financial strain and a dwindling amount of assistance available. 

However, there is some assistance still to be had if you know where to look for it and when. Many small businesses qualify for an employee retention tax credit for each member of staff that they keep on their payroll during the ongoing pandemic. In this case, up to $28,000 per employee can be had in tax credits – which is a sizeable chunk of money to put toward debts and other expenses. 

The problem with tax credits, of course, is that they do not always mean money in your pocket. Sometimes they simply mean less money that you or your business owes to the IRS. They are also only available during tax season, which can be far too late for businesses struggling in the months leading up to the start of the new year. 

What Can You Do if You End Up in Default?

Preventing a problem before it starts is always the best approach, but it is not always the most practical one. Sometimes, there is no way to avoid default. Some small business owners did not know the risks inherent to taking a merchant cash advance prior to being offered one. Others knew the risks but did not fully understand them. Still others fully understood these risks but were in such dire financial straits after the last few years that they had no other options. 

Whatever the scenario you might find yourself and your business in, there are options for dealing with the fallout of merchant cash advance default. 

One such option may be negotiating with your creditors. While many creditors who offer these sometimes-predatory advances are not willing to negotiate, other creditors that your company does business with may be. A lawyer can help you understand your options for negotiation and how this might open up your monthly budget to continue payments to your advance lender. 

You may also want to consider bankruptcy. While many people still think of bankruptcy as a last resort, your Florida bankruptcy attorney can show you just how easy a bankruptcy can make the process of finding a fresh start. Chapter 11 bankruptcy, in particular, may be the right answer for small businesses dealing with more financial burden than they can carry. 

The good news is that you do not have to deal with a merchant cash advance default alone. By partnering with the experienced team at the Van Horn Law Group, you can explore multiple potential solutions. Whether you would prefer to discuss negotiation with your creditors or the possibility of a Chapter 11 bankruptcy, our knowledgeable legal team can assist you at every step. Give us a call today to learn more and find out how we can help you prevent problems with default before they start – and help you sort them out if they already have!