What is Stacking?
Stacking is the act of accepting multiple cash advances at the same time or prior to one cash advance being paid in full. Thus, the borrower must make payments to multiple lenders. Usually it means that several daily ACH drafts are taken out of the borrower’s bank account each day.
The Dangers of Stacking
Merchant Cash Advances are already extremely expensive, usually requiring the borrower to pay a 40% or greater premium on the money they borrowed. When a company accepts more than one cash advance at a time (stacking), it greatly increases the financial burden on a company and makes it extremely difficult, if not impossible, to pay back the debt. Additionally, the more cash advances you have outstanding, the more of the company’s revenue is being used to repay the advances. Since there is a significantly higher cost of capital associated with cash advances as opposed to more traditional loans, the repayment cuts further into your profit margin. If you stacked multiple cash advances the repayments could very well cut into all of your profit and potentially put your company into the red (paying out more money than you have incoming revenue).
Entering a Death Spiral
This is a very common situation business owners tend to find themselves in with merchant cash advances. On paper, a merchant cash advance is very attractive because it is an unsecured loan that is easy to get and funds quickly. However, most cash advance lenders will require a certain monetary daily amount to be withdrawn from the borrowers account each business day. The danger behind the fixed monetary daily withdraw is that the withdraws can significantly cut into a company’s cash flow to pay other bills, especially if the company experiences a slower than usual month in sales and cash flow decreases because of it.
This is where the death spiral comes in: if a company experiences a slow month, a greater percentage of its cash flow is going toward paying off the advance, leaving them with less cash on hand for other bills. To counter the lack of cash on hand, the business owner will apply for another cash advance (stacking). The new cash advance will help in the short term, but the two repayments quickly catch up to the business owner and they are once again strapped for cash. To combat this, they apply for another advance, then another and another, and before the business knows it they can no longer afford to pay back the advances. Nasty collection calls, lawsuits, and judgments follow quickly behind a missed payment.
Alternatives to Stacking MCAs
If your company can qualify for more traditional loans from a bank, you should choose that route over a merchant cash advance. The application and funding process is longer, but the cost of capital is exponentially cheaper with traditional bank loans and lines of credit. However, it has become increasingly more difficult over the years for small business to qualify for traditional bank loans.
If your company’s only option is to take out a merchant cash advance, it is best to take only one advance out at a time, since stacking advances has proven very dangerous and has put countless small business out of business. Download our free guide to see what you need to consider when getting a merchant capital advance so that you can make sure you are being smart about your company’s debt.
If you are beginning to fall behind on your repayments on a cash advance, you need to be proactive and address the issue prior to falling into a death spiral. However, if you are currently in the middle of a death spiral you need to address the issue and get professional help immediately. Fuselier & Associates Financial has substantial experience dealing with cash advances and has prevented numerous clients that were in a death spiral from stacking cash advances from going out of business.
Contact us today to see how we can help you get out of a spiral and get back to running a profitable business.