Merchant Cash Advances (MCAs) have become a popular financing option for small businesses, offering quick access to cash based on future credit card sales. However, the high cost of borrowing associated with MCAs can lead some borrowers into financial difficulties, potentially resulting in a default on their obligations. When faced with an MCA default, securing additional funding can be challenging but not impossible. Here’s a guide on finding lenders willing to fund a defaulted MCA.
Understanding the MCA Default Scenario
An MCA default occurs when a business fails to meet the agreed-upon terms of the cash advance, such as making the required daily or weekly payments. This situation can arise due to various factors, including unexpected downturns in sales, mismanagement of funds, or an overreliance on high-cost financing. When a default occurs, it can severely impact a business’s creditworthiness and its ability to secure further financing.
Challenges of Financing After an MCA Default
- Damaged Credit Profile: Defaulting on an MCA can lead to negative impacts on a business’s credit profile, making it difficult to qualify for traditional loans or financing. Lenders may view a default as a significant red flag, associating it with financial instability.
- Limited Options: Many traditional lenders shy away from providing loans to businesses with a history of defaults. This can significantly limit options for obtaining new financing, particularly for businesses already in a precarious financial position.
- High Interest Rates: When seeking funding after an MCA default, businesses may find that available options come with high-interest rates and unfavorable terms. Lenders taking on the risk of lending to a defaulted borrower often compensate for this risk with higher costs.
Strategies for Finding Lenders
1. Explore Alternative Lenders
While traditional banks may be hesitant to extend credit to businesses that have defaulted on an MCA, alternative lenders may be more willing to consider the application. Online lenders, peer-to-peer lending platforms, and private investors often have more flexible underwriting criteria. They may take a more holistic approach, considering factors beyond credit scores, such as cash flow, sales history, and the business’s overall financial health.
2. Utilize Hard Money Lenders
Hard money lenders provide short-term loans backed by collateral rather than relying primarily on credit scores. If a business has tangible assets, such as real estate or equipment, it may be possible to secure funding through a hard money loan despite an MCA default. However, it’s important to note that hard money loans can come with high-interest rates and fees, so careful consideration is necessary.
3. Leverage Business Assets
If a business has valuable assets, such as inventory, equipment, or real estate, it may be able to secure financing through asset-based lending. Lenders specializing in this type of financing will assess the value of the assets and offer a loan based on that value. This can be a viable option for businesses facing challenges due to an MCA default.
4. Consider a Debt Restructuring or Consolidation Option
Some lenders specialize in debt restructuring or consolidation for businesses facing financial difficulties. These lenders can work with a business to renegotiate terms, combine existing debts, and create a more manageable repayment plan. This option can be appealing for businesses that want to consolidate their obligations and regain control over their finances.
5. Engage with a Broker or Financial Advisor
Navigating the lending landscape after an MCA default can be complex. Working with a broker or financial advisor who understands the intricacies of business financing can provide valuable guidance. These professionals have established relationships with various lenders and can help identify suitable funding options tailored to a business’s unique circumstances.
Conclusion
Finding lenders willing to fund a Merchant Cash Advance (MCA) default is challenging but not insurmountable. By exploring alternative lending options, leveraging business assets, and considering debt restructuring, businesses can regain access to capital and work towards financial recovery. Engaging with experienced financial professionals can further enhance the chances of finding suitable financing solutions. Ultimately, proactive measures and informed decisions can help businesses navigate the complexities of securing funding after an MCA default, paving the way for a more stable financial future.
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