Retail Business Facing Collections? Key Risks to Watch for When Using a Merchant Cash Advance

Running a retail business comes with its fair share of financial ups and downs. Whether you’re preparing for a busy holiday season, restocking inventory, renovating your storefront, or simply trying to stay afloat during slower months, the need for fast capital can arise at any time. In such situations, many retail business owners turn to what appears to be a quick and accessible solution: the Merchant Cash Advance, or MCA.

MCAs are marketed as flexible, fast, and forgiving, particularly for business owners with limited access to traditional financing options due to lower credit scores or short time in business. But while an MCA might offer a lifeline in the short term, there are significant risks attached, especially when businesses struggle to repay and find themselves facing aggressive collection efforts. MCA funders often hire a collections attorney to recover unpaid balances through legal actions like lawsuits or liens, which can threaten both the business and the owner personally. 

Here’s what every retail entrepreneur should know before taking on an MCA.

Why Retail Business Owners Turn to MCAs

A merchant cash advance is not a loan. Instead, it’s a lump sum of capital provided to a business in exchange for a percentage of future receivables in the form of credit card sales, daily bank deposits, or other business receivables. Typically, the advance is repaid through automatic daily or weekly withdrawals from the business’s merchant account or bank account, making it a consistent draw on future cash flow.

Retailers are often attracted to MCAs for three main reasons:

1. Speed: Unlike traditional loans that may take weeks to process, MCAs are often approved and funded within 24 to 72 hours.
2. Accessibility: Business owners with low credit scores or no collateral may still qualify.
3. Flexibility in Use: There are generally no restrictions on how the money can be spent, whether on inventory, payroll, rent, or marketing campaigns.
   

In short, when the need is urgent and the options are few, an MCA can seem like a financial lifesaver.

The Real Cost of MCAs for Retailers

One of the most significant misconceptions about MCAs is their cost structure. Since an MCA is technically a purchase of future receivables rather than a loan, it does not fall under the same regulatory umbrella as traditional lending products. This includes usury laws, which cap the amount of interest a lender can charge annually, usually around 25%.

Instead, MCAs charge what’s known as a factor rate, typically ranging from 1.1 to 1.5. So, if a retail business takes a $50,000 MCA at a factor rate of 1.4, they’ll owe $70,000 in total repayment, regardless of how quickly they repay. The effective annual percentage rate (APR) can often soar into the triple digits when broken down over time.

With payments often withdrawn daily or weekly, many retailers find that their cash flow becomes stretched too thin, making it difficult to reinvest in operations or cover basic expenses.

What Happens When a Retail Business Falls Behind on MCA Payments

If a retail business falls behind on payments or defaults entirely, the consequences can be far-reaching. Because MCA agreements typically include a personal guarantee, the funder can pursue both the business and the business owner personally to collect the unpaid balance, along with various fees and attorney fees. This is where a collections attorney focusing on MCA funding comes in, helping funders recover their capital through strategic legal actions.

The attorney may engage in:

• Sending out UCC lien notices to all of the merchant’s account receivables 
• Filing lawsuits
• Freezing business or personal bank accounts
• Pursuing legal judgments for breach of contract
• Placing judgment liens on personal property, including the owner’s home

Retailers often assume only their business is liable, but due to the personal guarantee, MCA contracts are structured to hold the individual accountable, even if the business is an LLC or corporation.

Legal Loopholes That Put Retailers at a Disadvantage

Since MCAs aren’t considered loans, they don’t fall under the Truth in Lending Act or other state usury laws. This allows MCA funders to include aggressive contractual terms that favor them heavily and put retailers at risk.

Some of these terms include:

• Confession of Judgment Clauses: Allows funders to win a legal judgment without a trial (where legal).
• Jurisdiction Clauses: Force any legal disputes to take place in courts favorable to the MCA provider, often far from where your retail business is located.
• Stacking Practices: Some funders approve multiple MCAs for the same business, leading to a snowballing debt crisis.
  

Retailers who don’t carefully review these agreements or seek legal advice may unknowingly sign away important rights.

How Retail Business Owners Can Protect Themselves

If you’re considering an MCA to help manage your retail operations, it’s critical to take the following steps:

1. Compare Other Financing Options: SBA microloans, equipment financing, or business credit cards may offer better rates and protections.
2. Ask About the Effective APR: Factor rates can be misleading—always ask what the true annualized cost will be.
3. Read the Entire Agreement: Watch for clauses around personal guarantees, confessions of judgment, and repayment structure.
4. Project Your Cash Flow: Ensure your retail business can sustain daily or weekly deductions without compromising operations.
5. Consult a Legal Expert: A quick review by a collections lawyer can help you avoid long-term damage.
   

What to Do If Your Retail Business Is Already in Collections

If you’ve already defaulted or are struggling to meet your MCA repayments, don’t panic, but do act quickly. MCA funders often hire a collections lawyer to pursue unpaid balances through legal actions like lawsuits or liens, so prompt action is critical. Here are a few options for retail business owners:

• Consult an attorney to review your MCA contract and explore defenses or negotiation options.
• Avoid refinancing with another MCA. Stacking debt rarely solves the problem, as it usually makes things worse.
• Evaluate your business entity protections. If you’re not incorporated, consider forming an LLC or corporation in the future to reduce personal liability.
  

Final Thoughts: MCA as a Last Resort for Retailers

Merchant Cash Advances may provide short-term relief, but they come at a high long-term cost. For retail business owners, it’s essential to fully understand the terms, risks, and personal liabilities involved before signing.

Used strategically and cautiously, an MCA can help a retailer weather a temporary cash crunch. But used carelessly, it can threaten not only your business but also your financial future.

In the ever-evolving world of retail, being cash-strapped is sometimes unavoidable. Just make sure the solution you choose doesn’t become a bigger problem down the road.