Too many MCA loans?

hardware store with too many MCA loans

This is an example of securing the wrong type of capital to meet your needs, specifically too many merchant cash advance or MCA loans. In 2011, a 74-year-old Southeastern hardware and industrial supply company underwent a change in ownership. To facilitate this purchase, the former owner agreed to a 10-year note at a reasonable interest rate for part of the purchase price. The real estate purchase was financed through a national bank. The company offers an extensive product range of hardware and building materials, serving both local homeowners and regional contractors.

The challenge:

too many MCA loansAfter the COVID-19 pandemic slashed their annual revenue by 50%, they encountered cash flow challenges.  Now business is starting to pick up again and they need to scale inventory and operations. To meet the increasing demand required more working capital.  With poor revenue history over the preceding 24-months they were left with few working capital options. To make matters worse, the allure of quick and easy loans marketed by the merchant cash advance industry proved too tempting. To stay afloat during the downturn the new owner had secured five MCA loans totaling over $788,000.

The consequences:

These easy loans came with a hefty payback amount, totaling a staggering $1,097,315 and interest charges of 30%. The daily and weekly debits added up to over $175,000 per month. Given their average monthly revenue of approximately $275,000, these obligations, along with the real estate mortgage, seller’s note, payroll, maintaining inventory, and general operating costs, proved to be an unsustainable burden. Each passing week brought the looming possibility of bankruptcy into sharper focus.

Possible solutions:

After reviewing a current income statement, balance sheet, and aging reports my first approach was to see if there might be enough assets that could be leveraged to take out the MCA loans and provide some short-term working capital. Unfortunately, there were not enough commercial receivables available. Inventory would be too hard to manage and FF&E had little secondary market value. Over the past 12-years the real estate had appreciated significantly and there might be enough equity available.

My second thought was to see if they could consolidating all the existing MCA loans into a single, new loan with an extended term and reduced monthly payments.

The third approach focused on negotiating for extended terms and/or lower monthly obligations with the current MCA lenders. Many lenders are happy to renegotiate the terms of your loan rather than have you default.

A fourth option was the possibility of securing a short-term, interest-only real estate bridge loan.  These funds could be used to pay off as many MCA loans as possible. Once the company was able to improve their cash flow and take on new business, they would be more attractive to traditional mortgage lenders and could refinance the bridge loan.

Utilizing one of these short-term solution would allow the company to eliminate, or restructure, it’s current debt load. Then they would be in a better position to grow revenue and rebuild their balance sheet. If the business was properly managed going forward, they may qualify for an SBA-backed term loan within the next 12 to 24-months.

If you would like a review of your company’s current capital structure or discuss various capital options for growth you can give me a call at (843) 790-3661, fill out the form on the Homepage, or book some time on my calendar that’s convenient for you. Regular business hours are Monday through Friday from 8:00 am to 6:00 pm Eastern Time. Other times by appointment only.

Brian Cate Headshot

Growth funding and working capital structure is my passion. I’ve worked with a wide range of companies over the years from start-up to $30+ million. I’ve helped companies to scale quickly, take on new projects, or capitalize on recent opportunities. Business loans and asset-based facilities from $50k to $10MM.

  • Brian Cate

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