Using a New MCA to Pay an Old One: 5 Risks to Examine Before Refinancing

Cash advances are quick money when you need it and for people who have nowhere else to turn. They are incredibly tempting to use to get out of a money bind. But if your business is really in need, you may be tempted to take more than one MCA at a time, or take a new advance to pay off the old one. Usually, it’s a bad deal. There is rarely any early payoff discount on the old finance charge, so the business pays the old finance charge in full, and then a new finance charge on top. The lower weekly payment can hide the higher total cost. It’s a double finance charge and a very expensive way to borrow.

The first risk is thinking that paying off an MCA early will save money on interest. Most MCAs don’t give a discount for early repayment, unlike a conventional amortizing loan, where paying early saves future interest. Instead, most MCAs call for a fixed amount that includes the full finance charge, so there is no savings. Here’s an example. Provider A has advanced $250,000 to your business and the total amount due is $337,500. The finance charge, $87,500, is built into this total. A is taking $9,375 a week from your business bank account, so after twelve weeks, your business has paid $112,500 toward the total and still owes $225,000. If your business makes that $225,000 payoff now, it’s the same as handing Provider A the whole $87,500 finance charge. Nothing saved.

The second risk is that you pay a second finance charge on money that already included A’s fee. Provider B writes an advance for $225,000, just enough to cover the $225,000 payoff with A. You got no extra cash for your business. Then the business repays $315,000 - a new fee of $90,000 - at a higher factor rate than A. In New York, a finance company that requires your business to pay off its own outstanding balance as a condition of a new advance must disclose the amount going to its unpaid finance charges from the earlier advance. The phrase ”double dipping” must be used. The firm must also specify the exact dollar reduction from what would otherwise be your new disbursement. This New York disclosure law does not cover a single financing over $2.5 million.

The third risk is that you think the lower weekly payment means that you are borrowing more cheaply. In the earlier example, Provider B’s weekly payment was $5,625, while A was getting $9,375. But B stretched the term to 56 weeks, which is how B could lower the weekly payment. Your business will end up paying $427,500 - the $112,500 you already paid A plus the $315,000 to B. Your business is paying $177,500 in finance charges for the use of $250,000 for about 16 months. It’s not your business’ cash flow problem that is solved. It’s only postponed.

The fourth risk is stacking: you keep both advances open rather than using B’s advance to close out A. This leaves more cash to operate your business in the short term, but you are paying a total of $15,000 a week - $9,375 to A, $5,625 to B. Can your business afford $15,000 a week? That’s an unsustainable load for many small businesses and can start a financial spiral. Experts advise against stacking.

The fifth risk is the new contract itself. Depending on its terms, the contract can be a loan under an assumed name. In New York courts, the test is whether the contract has a reconciliation clause and a finite term, and whether the funder has recourse if you file bankruptcy. If the advance is treated as a loan in New York, it falls under usury laws. Knowingly charging more than 25% a year without legal authority is criminal usury, a felony. According to the New York Attorney General, a company called Yellowstone took daily deductions from a small business’s checking account no matter what the revenue was, whether the firm was in the red or black. The interest rates on its advances went as high as 820% a year, the AG said. Also, the new funder files a UCC financing statement, the public lien notice. It lasts for five years unless continued.

A better route is to refinance with a conventional amortizing loan. The interest rate may be lower. Many loans allow early payoff without any prepayment penalty, though you do have to check the contract. With a conventional loan, you pay back only the principal left and any accrued interest - not the finance charge that the advance company has built in for the full term. That may be a large difference. SBA loans generally cannot refinance an MCA that is still active. The one exception is when an MCA is converted to a term loan and paid down for at least 24 months with no new agreements since. Then it can be refinanced with an SBA loan. Otherwise, look for a bank or specialty finance company. But if the outstanding debt is under $1 million, it can be difficult to find a lender. There are lenders, but many are selective about what they will refinance.

Before you sign the new contract, compare what you have to repay under each contract. The total cost is the real question.