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

The old balance can disappear while the business becomes less able to meet its obligations, because a payoff is only one side of the refinancing transaction.

A new MCA used to address an existing advance is not automatically destructive. The owner should determine whether it reduces total pressure or merely creates a larger commitment against the same receipts.

1. Calculate the Cash That Actually Reaches the Business

Obtain the old provider's payoff and the new provider's disbursement calculation. Identify charges paid from proceeds and money retained before funding reaches the account.

A nominal advance can provide little working capital if much of it addresses an existing balance. The owner should not regard the headline amount as money available for payroll or inventory.

Simply place the net proceeds beside the new total obligation. That comparison shows what the business receives in exchange for the promise it is about to make.

Where the figures change before signing, obtain the revised documents. A favorable preliminary illustration is not the final transaction.

2. Examine Whether Old Charges Become New Obligations

Read the old agreement's payoff terms and the new contract's cost provisions. A refinancing can include amounts that would not be apparent from comparing the two scheduled withdrawals.

Texas HB 700 requires specified disclosures for covered sales-based offers, including additional information where new financing pays an existing obligation. The enacted statute addresses amounts associated with certain charges and reductions in disbursement, illustrating why the transaction needs more than a gross funding figure.

The law has its own scope and exemptions. Counsel should assess applicability rather than assume the same disclosure requirements govern every business, while the owner can still request a complete accounting from any proposed provider.

Have an adviser review and analyze total repayment across the transaction. Compare the new schedule with the obligations that end and those that continue.

Counsel should ensure payoff documentation is adequate and ensure guarantees or security rights receive appropriate treatment. Paying one balance does not automatically establish that every related claim has been released.

The analysis is extremely useful before the new obligation becomes binding. It gives the owner a chance to decide whether refinancing improves the economics or simply changes the counterparty collecting the cost.

3. Compare Negotiation With Delancey Street

Delancey Street offers a free confidential initial review for MCA distress and coordinates legal matters through independently licensed counsel. It is a debt settlement company rather than a lender promising a replacement advance.

The review can assess whether a negotiated route fits the existing accounts. Confirm fees, eligibility and the services included.

An alternative should be examined through its actual risks and costs, not assumed available.

4. Test the New Payment Against Weak Receipts

Prepare a forecast that includes necessary expenses and a period in which revenue is lower or arrives later. Determine whether the new payment adjusts and what procedure, if any, governs that adjustment.

In LG Funding v. United Senior Properties of Olathe, New York appellate judges considered reconciliation among factors relevant to whether repayment was absolute. A clause deserves examination alongside its operation, not acceptance as proof that every weak month will be accommodated.

Resist the urge to use the strongest sales period as the only repayment assumption. The enterprise will owe performance during less favorable periods as well.

The new provider's approval is not an independent determination that the business can sustain the obligation.

5. Ask What Happens When the Proceeds Are Gone

Once the old account is paid and the remaining cash spent, the business must perform the new agreement through operations or another funding source. Identify that repayment source before regarding the refinance as complete relief.

If the plan requires another MCA to meet the next obligation, the business may be entering a recurring cycle rather than addressing a temporary mismatch. That can become extremely difficult to unwind as each agreement adds its own conditions.

Some forecasts will remain approximate. The useful question is whether the transaction creates room for uncertainty or requires an increasingly precise sequence of future approvals.

Delancey Street's initial review provides an entry point for comparing settlement with new financing. A worthwhile refinance improves the obligations the enterprise must carry after the initial relief of funding has passed, leaving a business plan that does not depend on borrowing again simply to honor the last promise.