Merchant Cash Advance Stacking: What Is It & Why Should You Avoid It?

Compared to well-known lenders like the Big 5 banks and the Canada Small Business Financing Program, merchant cash advances are a relatively new form of funding that emerged out of the 2008 recession in response to a greater need for accessible small business funding. Thanks to their youth—and some shady tactics employed by disreputable business cash advance lenders—many myths and misconceptions about merchant cash advances still persist in 2022, including the myth that MCAs are a scam, are inherently predatory, or are only for failing businesses.

In reality, there are many situations in which a merchant cash advance is the best funding option for a small business in Canada—for example, when you need funding quickly, need a smaller loan, can’t supply collateral, or don’t meet the strict approval requirements of lenders like the CSBFP or Big 5 banks.

While merchant cash advances are a safe and reputable form of funding, there are MCA lenders that will engage in disreputable tactics designed to make the lender money at the expense of your small business’s long term health and growth. The most common tactic employed by such lenders is called “merchant cash advance stacking” or “loan stacking”. It’s important for small business owners to be on the lookout for such tactics, especially if they were just approved or are already repaying an existing merchant cash advance.

Offers to stack advances can be tempting, but merchant cash advance stacking can put small business owners in a shaky spot. In this post, we’ll take a closer look at what MCA stacking is, why it’s dangerous, why small businesses might be tempted to stack MCAs, and alternative funding options to stacking merchant cash advances.

Let’s jump in.

Also known as “multiple positions”, merchant cash advance stacking describes the act of accepting multiple MCAs at the same time, prior to the first merchant cash advance (or possibly second or third MCA) being paid in full.

When merchant cash advances are stacked, businesses must make multiple payments to multiple lenders every day. Since MCA rates are typically higher than other forms of funding, doubling or even tripling the daily payment can put a serious strain on your cash flow, resulting in a higher likelihood of default.

It’s important to note that “stacking” does not refer to taking out a second loan to pay off the balance of an earlier loan. In this case, the balance on the first loan will be completely repaid so there will be nothing left to stack, and the second lender can evaluate whether to approve the additional debt.

Sometimes, MCA stacking occurs when business owners seek multiple business cash advances to fund their growth or cover operating costs, including the costs of previous advances. Business owners can also stack advances on top of other loans, which sometimes occurs when they aren’t approved for the full amount they asked for from other lenders.

Disreputable MCA lenders often base their entire business model on seeking out recently issued advances so they can contact borrowers with offers of more funding. When a small business owner receives a merchant cash advance, the initial lender will make a UCC (Uniform Commercial Code) filing, or lien, that becomes part of the public record—then, a second, less reputable broker could see the filing and reach out to the business to offer more money. These offers can be very tempting, but accepting a stacked MCA under these circumstances can put you in a tough spot and can also increase risk for the first lender.

Merchant cash advance stacking is especially dangerous under two circumstances:

1. When you accept additional capital just because someone offered it, not because you need it or have a plan for it. Reputable lenders know that your business’s success increases the likelihood of you paying back your funding—they recognize that if they loan you too much and you default, they will lose money. Their underwriting processes help determine how much funding your business can reasonably handle and their funding offer will be tailored to your business. It pays to beware of “special offers” that are made shortly after you begin repaying an existing advance—often, these offers will come from brokers who are hoping to capitalize on the diligence and underwriting process of the first lender in order to increase their own bottom line.
2. When you accept capital because you are having trouble making payments on other loans. Stacking MCAs or loans under these circumstances can be a slippery slope—many borrowers fall into a debt trap that is more likely to result in default.

Stacking merchant cash advances presents a number of pitfalls that can put small businesses in a precarious position. Here are four dangers of stacking merchant cash advances:

Merchant cash advance payments are automatically deducted from your daily or weekly credit and debit card sales. That means you’ll need to make multiple repayments per day if your business takes out multiple merchant cash advances from different lenders, which can seriously strain your cash flow.

A first business cash advance will be approved based on how much the lender reasonably thinks you can pay back, so taking on a second advance means there is a strong chance that you’ll be taking on more debt than you can handle. Even if you can repay each advance every day, your cash flow will be severely constrained by the automatic daily or weekly repayments.

Sometimes, business owners will take out multiple advances to address their immediate financing needs, such as payroll or rent, without considering how they will pay off their financing. Without a plan for how you’ll repay a merchant cash advance, it can be even more tempting to accept additional funding to cover your fees and repayments. This can increase your debt burden and make it easier to fall into a debt trap.

When you stack merchant cash advances, your rates and fees may double (or more). This financial burden will only increase as repayments cut further into your daily sales and profit margins, especially on slower days, which can create a slippery slope that can significantly increase your risk of default. Defaulting on your merchant cash advance(s) can lead to the filing of a UCC lien, the seizure of any collateral assets, and other negative outcomes for your small business.

Some loans, including bank loans and Canada Small Business Financing Program loans, may have rules against taking out other financing such as merchant cash advances. If you accept an MCA when you’ve already received other funding, you may be in violation of the terms of your initial agreement and the lender may demand full, immediate repayment.

If you’ve already received a merchant cash advance and find yourself in need of additional funding, there are alternatives to stacking advances. Here are four options to consider:

If you already have an MCA but you need more funding, you may want to ask your lender about refinancing your existing advance. Many MCA lenders will consider refinancing existing advances if the business owner has shown they are able to repay their funding on time, especially if more than 50% of the existing advance has been repaid.

You may also be able to refinance an existing merchant cash advance funding by acquiring a loan from a traditional lender, especially if your business is in a stronger position than it was when you first accepted the MCA.

Equipment and inventory financing loans are specifically issued to fund the purchase or repair of equipment or inventory, which acts as collateral to secure the loan.

If you are seeking additional funding with the express purpose of purchasing or repairing equipment or inventory, this kind of financing may be a better option. Instead of the automatic daily or weekly repayments of a merchant cash advance, equipment and inventory financing is often repaid using set monthly payments, which may be easier for your small business to integrate into your cash flow and monthly bookkeeping.

If your business has a large number of outstanding invoices, you have long accounts receivable periods, or you issue invoices for large amounts, invoice factoring can help you access the money you are already owed before your client pays.

With this form of financing, you essentially “sell” outstanding invoices to a lender, called a factor, in exchange for immediate cash. The lender will collect payment on the invoice from your client and will pay out the remaining amount to you (minus any fees). There are no repayments to worry about, which means there will be less strain on your cash flow.

A business line of credit is a flexible form of financing that allows business owners to draw and repay money as often as needed, only ever paying interest on the amount borrowed. Lines of credit are ideal for bridging cash flow gaps, covering unexpected expenses, or financing growth strategies. With a monthly repayment schedule, this form of financing may be easier to manage compared to multiple or large daily automatic withdrawals.

Reputable merchant cash advance lenders will not engage in predatory practices like merchant cash advance stacking. When issued by a trustworthy lender, merchant cash advances offer a number of advantages over financing options offered by traditional lending institutions, including:

• Simplified applications with less paperwork and less rigorous approval requirements.
• Faster processing and approvals, with funding sometimes available in as little as one business day.
• Greater flexibility and more room to negotiate terms.

With funding from as little as $3,000 up to $500,000, Greenbox Capital® can help business owners access flexible merchant cash advance funding to fuel the growth of their business.