The MCA Debt Trap: Escape Strategies

Merchant Cash Advances (MCAs) are the payday loans of the business world. They promise "fast cash with no credit check"—but they trap you in a cycle of debt that's nearly impossible to escape.

The numbers are brutal: 40-200% APR. Daily withdrawals that drain your bank account. Personal guarantees backed by confessions of judgment. Aggressive collection tactics including harassment and lawsuits.

If you're stuck in the MCA trap, this guide shows you how to get out.

How the MCA Trap Works

The Initial Hook

You need cash fast. Banks say no. Then an MCA company calls:

"We can get you $50,000 in 24 hours. No credit check. No collateral. Just sign here."

What they don't emphasize:

• You'll pay back $67,500 (35% "fee")
• They'll take $500/day from your bank account automatically
• Effective APR: 65-150%
• You personally guaranteed it
• You signed a "confession of judgment" (they can seize assets without suing)

The Debt Cycle Begins

Month 1-2:

• Cash injection feels great
• Daily ACH withdrawals start: $500/day
• That's $10,000-15,000/month out of your account

Month 3-4:

• Daily withdrawals are crippling cash flow
• Can't make payroll or pay rent
• MCA rep calls: "Need more cash? We can get you another $30K..."

Month 5-6:

• You take the second MCA to cover first MCA payments
• Now paying $800/day across two MCAs
• $16,000-24,000/month in withdrawals
• You're in the trap

Month 7-12:

• Third MCA to cover first two
• Now paying $1,200/day ($24,000-36,000/month)
• Every dollar of revenue goes to MCA companies
• Can't pay vendors, employees, yourself
• Business is a slave to daily withdrawals

Why MCAs Are Predatory

1. Hidden True Cost

MCAs hide their cost by calling it a "fee" or "factor rate" instead of interest:

Their Pitch: "1.35 factor rate"

Sounds like: 35% total cost

Actual APR: 65-150% depending on repayment speed

Example:

• Borrow: $50,000
• Factor rate: 1.35
• Payback: $67,500 ($50,000 × 1.35)
• Timeline: 6 months (daily withdrawals)
• Effective APR: 127%

For comparison, mafia loan sharks typically charge 50-150% APR. MCAs are legal loan sharks.

2. Daily Withdrawals Destroy Cash Flow

Unlike traditional loans with monthly payments, MCAs take money every single day:

• Monday: -$500
• Tuesday: -$500
• Wednesday: -$500
• Thursday: -$500
• Friday: -$500

Result: No breathing room. No ability to absorb slow weeks. Constant cash flow crisis.

3. Stacking (Multiple MCAs)

MCA companies encourage you to take multiple MCAs:

"You're paying us on time—that means you qualify for more funding! We can get you another $40K tomorrow."

Why they do this: More debt = more fees = more profit for them. They don't care if it destroys your business.

The death spiral:

• MCA #1: $500/day
• MCA #2: $350/day (taken to pay #1)
• MCA #3: $450/day (taken to pay #1 and #2)
• MCA #4: $300/day (taken to pay #1, #2, #3)
• Total: $1,600/day = $32,000-48,000/month

Unless you're doing $150K+/month in revenue with 40%+ profit margins, this is mathematically impossible to sustain.

4. Personal Guarantees + Confession of Judgment

You signed two devastating documents:

Personal Guarantee: Your house, car, savings are on the line

Confession of Judgment (in some states): You pre-authorized the MCA company to:

• Get a judgment against you WITHOUT a lawsuit
• WITHOUT notice
• WITHOUT a trial
• Immediately garnish wages, seize bank accounts, file liens

Confessions of judgment are legal in NY, OH, PA, IL, and a few other states. They're illegal in CA, FL, TX and most others.

5. Aggressive Collection Tactics

When you can't pay, MCA companies:

• Call you 10-20 times per day
• Call your employees, customers, family
• Threaten criminal charges (illegal threat, but they do it)
• File UCC liens on all business assets
• Freeze bank accounts overnight
• Show up at your business unannounced
• Sue you and garnish wages

They make debt collectors look friendly.

Real-World MCA Horror Stories

Example 1: Restaurant Owner (4 Stacked MCAs)

Facts:

• Restaurant doing $60K/month revenue
• Took first MCA for $30K to buy equipment
• Daily withdrawal: $400/day
• 6 months later, took second MCA ($25K) to cover first
• Then third ($35K), then fourth ($20K)
• Now paying: $1,600/day = $48,000/month

The Math:

• Revenue: $60,000/month
• MCA payments: $48,000/month
• Remaining for ALL expenses: $12,000/month
• Rent: $8,000
• Payroll: $15,000
• Food costs: $18,000
• Deficit: -$29,000/month

Outcome: Business closed. Owner filed personal bankruptcy. Lost everything.

Example 2: Retail Store (Confession of Judgment)

Facts:

• Store owner in NYC took $50K MCA
• Business slowed, couldn't make payments
• MCA company filed confession of judgment in NY court
• Bank account frozen overnight: $35K seized
• No warning, no lawsuit, no trial
• Owner couldn't make payroll
• Business closed within 2 weeks

Lesson: Confessions of judgment are devastating. Never sign them if possible.

Escape Strategies

Strategy 1: Immediate Refinance (If You Still Can)

Best For: You're current on MCAs but they're killing your cash flow

Action: Get a traditional loan to pay off MCAs immediately

Requirements:

• Credit score 600+
• 2+ years in business
• Enough cash flow to qualify for traditional loan

Where to Look:

• SBA lenders (if qualify): 8-12% APR
• Online lenders (Bluevine, OnDeck): 12-25% APR
• Credit unions
• Even 25% APR is better than 100% MCA rate

Example Savings:

• Current: $75K in MCAs, paying $1,200/day
• Refinance: $75K term loan at 18%, 3 years = $2,700/month
• Old payment: $24,000-36,000/month
• New payment: $2,700/month
• Cash flow improvement: $21,300-33,300/month

See our Refinancing guide for details.

Strategy 2: Negotiate Settlement

Best For: You're behind on payments, business is struggling but has some cash

How It Works:

1. Stop making payments (you're probably already behind)
2. Let MCA company know business is failing
3. Offer lump-sum settlement (50-70% of remaining balance)
4. They'd rather get something now than nothing in bankruptcy

Negotiation Script:

"My business is failing. I can't keep up with daily withdrawals. I have $[AMOUNT] in cash available right now. I'll pay that as full settlement, or I'm filing bankruptcy and you'll get nothing. Which do you prefer?"

Typical Settlement: 50-70% of balance

Get It In Writing: MCA companies will verbally agree then sue you anyway. Require written settlement agreement BEFORE payment.

See our Negotiation guide for detailed scripts.

Strategy 3: Change Your Bank Account

Best For: Desperate situation, can't pay, need to stop daily ACH withdrawals immediately

Nuclear Option Warning: This will result in lawsuits, but it stops the bleeding

How It Works:

1. Open new business bank account at different bank
2. Transfer operations to new account (revenue deposits, bill payments)
3. Close old account or leave minimal balance
4. Daily ACH withdrawals fail
5. You regain control of cash flow

Consequences:

• MCA company will immediately declare default
• They will call constantly
• They will likely sue you
• They may file UCC liens
• They may use confession of judgment (if applicable)

When to Use This: Only when daily withdrawals are literally putting you out of business. This buys you time to negotiate or file bankruptcy.

Legal Note: This isn't illegal. You have the right to change bank accounts. But it's breach of contract and will trigger aggressive collection.

Strategy 4: Bankruptcy

Best For: Business is dead, you're personally liable, can't pay

Personal Chapter 7 Bankruptcy

What It Does:

• Discharges your personal guarantee
• Stops all collections, lawsuits, garnishments
• Fresh start in 4-6 months

Cost: $1,500-3,500 (attorney + filing fee)

Impact:

• Credit score tanks (130-200 points)
• Bankruptcy stays on credit 10 years
• Can rebuild credit in 2-3 years
• Protected assets (homestead, retirement) are safe

For MCA Debt: Bankruptcy is often the best solution because:

• MCA companies won't settle for reasonable amounts
• Interest rates are so high you'll never pay them off
• Personal guarantees make you vulnerable
• Bankruptcy discharges 100% of the debt

See our Chapter 7 guide.

Business Chapter 11 (If Business Is Worth Saving)

If: Business has real value, just strangled by MCA debt

What It Does:

• Automatic stay stops all collections (including daily ACH)
• Restructure MCA debt to reasonable terms
• Pay 40-60% over 3-5 years
• Business continues operating

Cost: $15,000-50,000 (expensive)

See our Chapter 11 guide.

Strategy 5: Legal Defenses

Some MCA contracts are legally questionable:

Usury (Excessive Interest)

• Some states cap interest rates (usury laws)
• MCAs try to avoid this by calling it a "purchase" not a "loan"
• Courts increasingly ruling MCAs are loans subject to usury caps
• If MCA violates usury law, contract may be void

Confession of Judgment (Unenforceable in Most States)

• Legal in NY, PA, OH, IL
• Illegal/unenforceable in CA, FL, TX, and most states
• If MCA company tries to enforce COJ in state where it's illegal, you can fight it

FDCPA Violations (Fair Debt Collection Practices Act)

If MCA collectors:

• Threaten criminal charges (debt is civil, not criminal)
• Harass you with excessive calls
• Contact third parties (employers, family) to shame you
• Use abusive language

You can sue them for FDCPA violations. Damages up to $1,000 + attorney fees.

Document everything: Record calls (where legal), save voicemails, keep logs.

Prevention: How to Avoid the MCA Trap

Red Flags (Run Away If You See These)

• "Fast cash, no credit check": There's always a catch
• Daily ACH withdrawals: Poison for cash flow
• Factor rates over 1.2: Means 20%+ fee = 40-100%+ APR
• Confession of judgment: Never sign this
• Stacking encouraged: "You qualify for more!" = They want you trapped
• No payoff quote: Some MCAs won't let you pay off early (full fees apply regardless)

Better Alternatives

• SBA loans: 8-12% APR, but slow (60-90 days)
• Business line of credit: 10-20% APR, only pay interest on what you use
• Invoice factoring: 1-3% per month (12-36% APR), better than MCA
• Equipment financing: 8-20% APR, secured by equipment
• Business credit cards: 15-25% APR, interest-only minimums
• Personal loan/HELOC: 6-15% APR (if you have home equity)

Bottom Line: Almost ANY other financing is better than MCAs.

Questions to Ask Before Taking Any Loan

1. What's the APR? (Not factor rate—annual percentage rate)
2. What's the total payback amount? (If borrowing $50K, how much total will I pay?)
3. What's the payment schedule? (Monthly, weekly, daily?)
4. Can I pay it off early without penalty?
5. Is there a personal guarantee?
6. Is there a confession of judgment? (Never sign)
7. What happens if I can't pay?

Action Plan If You're Trapped

Immediate Actions (This Week)

1. Stop taking new MCAs: Don't dig deeper
2. Calculate total outflow: How much are you paying daily/monthly across all MCAs?
3. Calculate cash flow: Is this mathematically sustainable?
4. Pull your contracts: Read what you signed (personal guarantee? confession of judgment?)

Short-Term (This Month)

1. Explore refinancing: Call 3-5 lenders, see if you qualify
2. Consult bankruptcy attorney: Free consultations—know your options
3. Document harassment: If MCA collectors are violating FDCPA, build case
4. Consider bank account change: Have backup plan if you need to stop ACH

Decision Point

Can you refinance?

• Yes → Do it immediately. This is your best exit.

Can the business survive with restructured debt?

• Yes → Negotiate settlement or file Chapter 11
• No → Close business, file personal Chapter 7

Are you judgment-proof? (No assets, no income)

• Yes → Stop paying, let them sue, wait for statute of limitations
• No → File bankruptcy to protect assets

Frequently Asked Questions