When small business owners need more funds than they are offered, often a cash advance broker offers more than one Merchant Cash Advance (MCA) at the same time. This practice is called stacking.
Stacking MCAs is very common because small business owners can access needed funds when their approvals are short of what they need. However, stacking is a deadly practice despised by MCA companies because when small business owners are stacked, they are almost certain to default. The Center for MCA Research estimates the default rate for small business owners who stack to be over 80%.
This article discusses some of the outcomes when brokers stack small business owners and what to do if you are in a position where you cannot pay your advances or are facing litigation because you cannot make your payments.
By Thomas Tramaglini, Chief Operations Officer
Partner, Center for MCA Research
Simply, small business owners have a hard time accessing working capital from banks and low cost lenders. Because banks have such a high threshold for approval it makes it more likely to get struck by lightning than to secure a loan from low cost outlets like the US Small Business Administration. So small business owners turn to alternative lenders and cash advance companies for funding.
Merchant cash advance companies have their own science (which is not science in any way) to approve who will get their advances. However, most of the time small business owners request to brokers their needs are in excess of what their approval is for. From that, MCA brokers are able to find more than one approval from different MCA companies and offer multiple cash advances to one small business owner at the same time.
This is Stacking.
Stacking is when brokers give more than one (sometimes many) cash advances to one small business owner within a day or so of each MCA. Brokers make stacking an art and are clear with the small business owners who they stack, they do not want the MCA companies to know they are getting more than one cash advance. And because funding reviews are faster than the banks, unless the broker has a massive delay between fundings, as long as the business owner does not tell the MCA company on the funding call that they are taking more than one advance, it is very hard for the MCA company to know that it is being stacked.
Brokers Love Stacking
Brokers love stacking for a couple of reasons. First, most brokers are paid based on their funding amounts so the broker gets paid for more than one advance from the MCA company. In some cases, this can double their commission or more. Second, the broker makes the small business owner happy because he or she just procured more money for the small business owner(s). This may make the small business owner come back for more funding in the future, or more prevalent, when the small business owner begins to have trouble paying their advance, the broker may be able to further fund their client, make more money, while eventually the small business owner is sued, closing his or her business, or facing a judgement.
MCA Companies Hate Stacking
MCA companies hate stacking. MCA companies have one goal. To make money at the expense of the small business owner by having the small business owners paying back their commitment.
As previously mentioned, MCA companies have their own process for approving who they will lend to... "purchase future receivables" from which they feel comfortable. While one can argue the poor science (if any) involved in their approval systems (revenue, deposits, etc.), it is their system and they ALWAYS want small business owners to make their payments.
When stacking occurs, small business owners usually cannot make their payments after some time causing the small business owner to default, ultimately leading to UCC or legal action by the MCA company.
While few brokers are held accountable for stacking, there are some cases (e.g., AKF, Inc. dba Fundkite v. First Point Funding) which are ongoing that underscore how MCA companies do not like stacking and the damage it causes the MCA company and the small business owner.
What happens to small business owners when they stack... Most of the time, small business owners do not know what is happening until its too late.
Small business usually have no idea how bad stacking is.
Most of the time, small business owners are told they can afford their stacked advances, and because each advance is separate few can see what the implications of the payments are. In some cases, we have seen the smartest people sell over 100% of their receivables to MCA companies to bridge funding needs or advance on their payroll. Few small business owners thoughtfully understand the mechanisms needed to know that stacking is and can be detrimental to their business.
That there is a point most small business owners will not be able to make their payments after stacking.
When a small business owner takes on more than one advance at the same time it is only a matter of time until they cannot make their payments. We have written about the time when revenue becomes overwhelmed by MCA payments. Once more money is going out than coming in eventually savings will be exhausted and the clients will begin to default on their commitment(s).
Into the quicksand. Small business owners usually panic and look for consolidation or more funding.
One of the most common first steps that small business owners make is when they begin to hit the place when revenue starts to falter compared to the MCA payments the small business owners will call the brokers and ask for consolidation or more funding. In many cases the small business owners take on a Reverse Consolidation or another advance but these are always a dead end and just prolong the inevitable default, as well as lead to more debt and a deeper hole to get out of.
Once the small business owner begins to default, harassment and UCC actions come first.
Even before the lawsuits come, MCA companies will use collections firms or themselves initiate UCC actions. Once you begin missing payments the UCC lien will be filed in your state, serving as a marker telling the public that you owe money. Once the UCC lien is in filing status, the MCA company or its collections firm will begin to harass you, your suppliers, customers, family members, and more. They will also begin to freeze your bank accounts, processing agents, and payroll accounts, and anything they can do to begin to recover the money you owe them.
The biggest issue is that you lose control and they have the high ground and there is not much you can do.
Litigation is usually the final step.
Depending on how many advances you have and who the players are in your portfolio, litigation will be filed in states such as New York or Utah, where the laws are beneficial to the MCA companies. The MCA companies want to achieve a fast judgement so they can begin collection of funds which are frozen, garnish wages, and possible domesticate in your homes state to collect assets for liquidation.
Three things that small business owners can do.
1 - Do not take more than One Merchant Cash Advance.
If you are considering taking more than one cash advance or loan at the same time, understand the consequences. From our research, 8 in 10 small business owners who stack cannot handle their advances and eventually default. The rule of thumb is that you should never take on more than one advance. However, it is easier said than done and most small business owners never fully understand the implications of doing so.
2 - Expose and Work With a Firm Like Ours to Go After Brokers.
The most guilty and suspect person or group in the stacking process is the broker.
Save all texts, emails, and backup so you can prove you were stacked by the broker and can prove who did it.
Then, retain Beacon Client Solutions. We will go after the broker to recover damages and help the small business owner meander through the mess that the MCA company has caused. In some cases, the MCA company will go after the broker as well.
3 - Enter a reputable settlement program - NOT a scam.
Because you defaulted, you are likely subject to UCC actions, harassment, and litigation. Our team will work to defend you, handle your litigation, end UCC actions and harassment, as well as work with the MCA or loan companies to restructure your debt so you can return your business to where it should be.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico, and Canada.
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