MCA Stacking Explained: 6 Effects on Your Business

Merchant cash advances can quickly turn into traps when you take one, and then another, and then another while the earlier ones are still being repaid. Several funders make daily debits from the same bank account every business day, and the combined drain can easily outpace the revenue. A slow week can’t be absorbed, and a single missed debit can trigger default on every advance.

This practice is called stacking, and it can result in several funders all drawing on your receivables at once. It can also cost more, not less, because later advances are usually priced more aggressively. The realistic way out is to renegotiate all of your positions at once, not by taking another advance.

Borrowing to Fund the Debt

Nobody starts out meaning to stack. Most owners take their first advance because there’s a gap between current revenue and current expenses, and the money seems like it will fix things. Daily debits from the funder take a steady bite out of cash flow. If the business doesn’t pick up, it can seem like taking another advance is the only way to pay the first one. Then it’s back to square one, because now you’re borrowing to fund the debt.

This is where brokers get involved. They know a merchant with one advance and a daily payment history can be funded again. That’s an easy commission. Some funders advertise second, third, or fourth positions directly. The first-position funder may have a contract ban on stacking, but that often doesn’t stop a later funder from contracting with the same merchant.

How Stacking Can Come Down on Your Business

The simplest effect of stacking is that cash is going out faster than it’s coming in. Each advance adds to the daily debit amount, while revenue stays the same. Let’s make up some numbers to get a sense of how this might play out in practice. A business with $15,000 a day in sales might take three advances and sign on to daily debits of $1,800, then $1,400, then $1,100. That’s $4,300 before payroll has to come out. Out of every dollar of revenue, only about seventy-one cents is available for the business’s actual operations. The reality of stacking looks like the New York Attorney General’s account of one baker who paid Yellowstone funders more than $2,000 every day in repeated advances.

The second effect is that each later advance costs more. The reason this happens is that later lenders sit behind everyone else who’s collecting on your cash flow. In our example, this might happen with a factor rate on each advance of 1.35, 1.45, and 1.49.

Third, if the business gets a little slower, that $15,000 example can be $11,000 one day, and it might stay at that level for a week or two, or longer. A normal slow period turns into a financial crisis because the revenue has to cover the same fixed payments regardless. Some contracts also have a reconciliation clause that would have allowed you to request that the debits be adjusted if your revenue were to drop. Stacking of MCAs can leave you short on paying the very debit that is taking place the next day.

Fourth, the real killer of a stacked position is that if you miss a debit, you miss it everywhere. A single dip into the red in your account can put that $15,000 a day business into a default position. This kind of risk can be hard to see on paper, because what matters is whether the account can cover the debits on a given day. It can seem manageable until it is suddenly not.

Fifth, for some merchants the worst effect of stacking is that multiple funders are all trying to collect from the same receivables. They can all record a UCC lien on the receivables, so your best asset is also the asset to which multiple funders have a claim. UCC-1 filings have priority in the order they’re recorded, and if it ever comes to a fire sale, later funders are behind the earlier ones and may well be out of the money entirely. A UCC filing lasts for five years from the date it was recorded.

In some cases, a funder or factor may decide to notify your customers directly and instruct them to send their payments to the funder rather than to you. Under UCC 9-406, a creditor is allowed to request direct payments from your customers. Funds get intercepted before they hit your account.

Sixth, if you default, each funder acts on its own contract at once. Many MCA contracts historically included a confession of judgment clause, letting the funder obtain a judgment against you without having to go to court. In August 2019, New York changed its law to bar filing a confession of judgment there against non-New York businesses. Now funders generally have to sue you, serve the suit on you, and then go through litigation and the judgment process before they can collect. The whole process becomes slower and costlier for the funder. This can make a big difference in any negotiation. The realities of how stacking can come down on your business depend on how your contracts are worded, whether your advances include a reconciliation clause, whether your state’s laws cover your interests, and what the courts make of the issues.

Realistic Way Out

A business sliding into a stack is like a car in sand. A new MCA can only make it slip more quickly. The only realistic way out is to treat the whole stack as a single problem, and to modify terms with every funder who still has money at stake. For a funder who sits behind the others and has little chance of getting any cash in a liquidation, it can be a better business decision to renegotiate its position than to default and litigate. Most funders would prefer a paying business on modified terms to taking the risk of losing it.

Relief can come in two forms. Short term, the daily debit gets cut to something the business can sustain, and the account stops going negative. Longer term, the balances get renegotiated into terms the business can finish. Lowering just one position doesn’t solve the daily drain. It’s worth it to lay out every position and their daily debit and contract details, and to do it early. The longer you hold out, the less leverage you have.

Stacking is a trap, but the trap itself is just the daily arithmetic. And arithmetic can be renegotiated. If you recover, you find some way to make the daily numbers work in your favor instead of against you.