Salon, Barbershop, and Spa Owners: 6 Questions About MCA Debt and Booth Rentals

If most of your chairs are rented to independent stylists, booth rental does change your merchant cash advance picture, and it may work in your favor. When the funder read your bank statements, it saw all the client payments you received. It did not distinguish between payments that you received for your own services and payments received for your stylists. Both types of payments went into the same account. The funder has no way of knowing that you paid much of the incoming revenue out to your stylists. It just knows what the combined cash flow is, and uses that to determine if you are eligible for a cash advance, and how large a cash advance you will be approved for.

If your hair salon advance was sized based on deposits that included pass-through money for your stylists, you have a strong argument to bring to the table in a negotiation. The chances are good that your payments were based on an inflated number, which means your payments are too big.

Funders also see salons as one of the easiest businesses to qualify and collect from. Most of the cash comes from credit cards, so the cash flow into the business account is steady and transparent. Work is done by the owner or a small team, so there is rarely a financial manager.

Salon owners have a great deal of emotional investment in their business and in the people they service, so owners are not likely to just walk away from their business. Even when things are going wrong, salon owners will exhaust every option before they let the chairs sit empty, which makes salons strong collection targets. Some funders will offer a renewal before your advance is even paid down.

A snowstorm can wipe out an entire day of revenue. Your funder doesn’t care, and it certainly won’t turn off its ACH pull on the days you’re slowest. A $650 daily advance payment takes the same $650 from your business bank account on a Monday you grossed $400 with two no-shows, and the $650 from the packed Tuesday before Thanksgiving you grossed $4,200. You absorb all the downside.

A second type of advance makes payments from a share of each day’s card sales. It sounds like an improvement, because the funder is giving you a break on slow days. But the repayment amount is chosen so you will pay back your full advance, with the factor rate included, before the end of the term. Switching to the sales percentage model won’t give much relief.

Salon owners often get their renewal offers in October, a month or two before their peak months, when the temptation to stock up is strongest. The trouble comes the following January and February, when the payments are still due and the business slows down significantly after the holidays.

In a booth rental salon, the stylists are independent contractors who pay the salon owner rent for use of the chair. Your real income is booth rent. When they review your merchant statements, a funder sees the card volume for all your stylists, as well as your own, and you may be offered a merchant cash advance based on that total. That can lead to a merchant cash advance that is sized based on revenue that is greater than what you take home each month. Once the payment is calculated based on stylists payments, there may be a substantial risk that the daily pull can quickly consume most or all of what you are taking home from booth rental fees.

Do you have a group of independent contractors who rent space to conduct their own business, or do you have employees that you aren’t treating as such? Publication 4902, available on the IRS website, says employers don’t need to control a worker at all times to have an employee. Right to control is enough. The IRS asks whether the employer sets the hours, decides the shifts, and sets the prices and fees, and who decides which products to buy. You will need to be clear that the salon’s gross revenue is a combination of your business revenue and the revenue of your stylists who are independent contractors.

What Percentage of Monthly Revenue Goes to MCA Payments

Adding up what you owe across all outstanding MCAs, your remaining payback, and what percentage of monthly revenue goes to MCA payments, will give you a good picture of how bad it’s gotten. For a salon, anything over 25% is a danger zone, and over 35% and most salons can’t keep operating without intervention.

Stacking is common in salons, but it can be dangerous. Sometimes the payments leave the salon short, and you borrow again to cover them. The second MCA lender often doesn’t know or care about the first, and it’s happy to oblige. Before you know it, one $40,000 advance becomes three MCAs, and you have to find more than $1,500 in your accounts every day just to cover the payments.

A Structured Resolution

Many of the MCA funders, especially the smaller ones or the ones in the middle-tier, will negotiate a lump sum settlement when they see credible financial distress. The lump sum is typically 40 to 65 cents on the dollar. If you owe $85,000 across two advances, you might settle for $45,000 to $55,000, which ends the daily pulls immediately.

If you can’t afford to put together a lump sum payment, your first request should be for time and a schedule change. Often, a negotiated repayment schedule is going to involve weekly or bi-weekly payments, which allows the lender to get paid back while offering you breathing room in the daily cash flow. Funders would often rather spread out the payments rather than risk a default.

In some cases, you can replace multiple MCAs with a single lower-rate facility. It leaves a single manageable payment instead of the many unpredictable daily ACH pulls. Lower-rate facilities are easier to obtain for salons with clean books and 18 months or more of revenue history.

You can settle your merchant cash advance debt and keep your lease. Landlords aren’t parties to MCA agreements. What you do have to watch is any UCC lien or bank levy that disrupts rent payments. The goal of a structured resolution is to get control over the debt while maintaining your payments to the vendors that keep your doors open - rent, payroll, and product orders.

Resolving all of the cash advances can take anywhere from a few months to two years. Collections can drag on, and the more funders there are the longer it runs. What gets fixed first, though, is the daily drain on the account.

If you’re a salon owner struggling with daily debits or a couple of quiet weeks from trouble, take a clear look at where you stand now. Acting sooner keeps more choices open. After default, a frozen bank account or a judgment, far fewer choices remain.