Early MCA Payoff Discounts: 5 Conditions to Verify Before Sending Money

The ‘early payoff discount’ offered by merchant cash advance (MCA) funders is a frequent ruse for a renewal advance.

• First, check that the payoff will be taken from a normal lump sum payment in your account, not an added tranche from a new advance.
• Second, check how much is owed before vs how much is owed after.
• Third, check that the total payoff figure and the terms that apply are in writing.
• Fourth, check whether you have weighed it against all the stacked balances.
• Fifth, verify that the funder will release the UCC liens once the payment is taken.

Check these offers carefully, but if they are genuine they can be a significant source of savings and relief.

A Lump Sum Payment from Savings

If the funder can collect enough today, they might just want to get the money off their hands. They can use it for other advances in the meantime. If you can afford to make a lump sum payment from savings, that can be real money saved.

The money should be coming from a balance in your business bank account. It should not be coming from other credit lines or advances. This would only start a new cycle of debt. If you are considering paying off an MCA with funds from the business’s own accounts, you can get a good idea of your potential savings. Compare the payoff figure directly to the cost of simply finishing the current MCA’s scheduled term. If the payoff is a discount and the cash is spare, it could be a smart play.

Only Available by Taking a New Advance

What funders call an “early pay discount” is sometimes only available by taking a new advance. The new advance is used to pay off the old balance. But the new advance carries a factor rate on the new amount, and the product is often bigger than the old balance. When the difference is accounted for, the new advance often leaves you owing a bigger sum than the old balance. Brokers typically make more commission from the larger contract.

In general, watch for total amounts rather than relative payments. Compare the total owed after a new early pay discount vs the old balance. If the new product ends up with a bigger payment figure on the whole amount owed then be very skeptical. Funders may run numbers in such a way that they claim a ‘discount’ or ‘saving’ that sounds large but takes only a small amount off of a stack of debt balances.

Take a composite case drawn from common patterns. A business with two stacked MCAs was offered an “early payoff discount”. The “discount” required that a new, larger advance be given, to pay off both balances. The business owner was close to accepting until a review of the numbers showed the factor rate on the new advance more than erased the ‘discount’. The full amount of the new MCA was larger than what was owed under the two prior stacked MCAs.

Rather than going with the new advance, the owner worked with a specialist who got both funders to settle. The total balances at stake were roughly $81,000, which settled for about $26,000, close to a 68% reduction. No new financing was involved. Results vary from case to case, are not guaranteed, and do depend on the particular funders involved.

Payoff Figures

Always get payoff figures confirmed in writing before remitting funds. These statements should confirm the exact sum required and spell out the terms for the total payoff. Many MCA contracts are signed on the funder’s paper, with little to negotiate. The party offering the payoff writes the terms. Read exactly what is proposed, and not the verbal summary of the person offering it. The same goes for new financing being used to pay off a balance.

In New York, the required MCA disclosure must have a row on paying off faster. It must say whether paying early still requires all or part of the finance charge up to a stated dollar amount, and whether extra fees apply and how much. In California, the required MCA disclosure must spell out any fees for paying faster, or that none are required.

Look at the full profile of debt products you owe, and not just the payoff sum in front of you. Each balance pays out separately, but it is the overall burden that counts. When handling stacked MCA debt, funders and brokers often like to have one relationship at a time. Each promise and figure looks better alone. Instead, lay out every balance, every factor rate and every UCC filing side by side, and judge any new payoff against that. You might well come to a very different conclusion.

Once the sum required by the MCA funder is paid, a signed demand for a UCC termination should be sent, and the owner should make sure the termination goes through. After you send your demand, the funder has 20 days to file or mail the termination. Otherwise, it may have to pay $500 in damages on top of any harm caused.

You also need to look at the tax side. The IRS generally treats debt that is canceled for less than was owed as taxable income, unless an exception such as bankruptcy applies. Lenders generally file a Form 1099-C when debt of at least $600 is canceled. Before accepting any write-down or early pay discount, always consult a tax adviser.

There are some offers for early payoff discounts that are real. You cannot make a judgment about a reduction or discount without seeing the total balance to be paid, in dollars, and comparing that to what was owed before. The whole text of the new contract matters, not just a word about a ‘discount’.