What is Merchant Cash Stacking & Why Should You Avoid It?

Compared to inveterate lenders like SBA and banks, 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 cash advance lenders—many myths and misconceptions about merchant cash advances still persist in 2022, such as the perception that MCAs are inherently predatory and only for failing businesses.

In reality, there are many instances in which a merchant cash advance is the best funding option for a small business—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 SBA or commercial banks.

Merchant cash advances are a safe and reputable form of funding; however, there are MCA lenders that will engage in disreputable tactics designed to make the lender money at the expense of the 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 tenuous position. 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 refers to the act of accepting multiple merchant cash advances at the same time, prior to an MCA (or possibly two or three MCAs) being paid in full.

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

“Stacking” does not refer to business owners who take out a second loan to pay off the balance of an earlier loan in order to acquire more funds. In this case, the second lender can evaluate whether to approve the additional debt and the balance on the first loan will be completely repaid, so there is nothing to stack.

Sometimes, MCA stacking occurs when business owners seek multiple advances to finance 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 a small business can’t get the full amount they asked for from other lenders.

There are also lenders whose entire business model is based on seeking out recently issued advances and contacting 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. A second, less reputable broker may see this 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 the borrower 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—if they loan you too much and you default on your loan, the lender loses money. Their underwriting processes help determine how much funding your business can reasonably handle and their funding offers will be tailored to the unique needs of 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 underwriting process and diligence of the first lender in order to increase their 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 and many borrowers fall into a debt trap that is more likely to result in default.

Stacking merchant cash advances presents a number of dangers that can put small businesses in a precarious position. Here are 4 pitfalls of stacking merchant cash advances:

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

A first advance will be granted based on what the lender reasonably thinks you can pay back, so taking on a second advance means you are likely taking on more debt than you can handle. Even if you can repay each advance, your cash flow will be severely constrained by the automatic daily or weekly repayments.

Sometimes, merchants will take out multiple MCAs to address immediate financing needs without considering how they will pay off their financing. Without a plan for how you’ll repay an advance, it can be even more tempting to accept additional funding to cover your fees and repayments, which can increase your debt burden and make it easier to fall into a debt trap.

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

Some loans, including bank loans and SBA loans, may have provisions 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 4 options to consider:

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

If your MCA lender agrees to refinance your existing advance, be aware of something called “double dipping”. Double dipping refers to paying fees on top of fees, and occurs when you refinance an advance and your lender uses the funds from the new advance to pay off the existing balance. If both advances use factor rates and have pre-determined payback amounts, your offer may use a portion of the new funds to pay down the remaining unpaid fees in addition to the principal of the new loan, thus driving up the cost of the new loan so that you are essentially paying interest on interest.

A lender who doesn’t double dip will waive the fees on the existing advance. A lender who does double dip will issue enough funding to cover the principal and fees in addition to the new loan amount. Always ask your lender for a detailed breakdown of costs—they should be able to tell you whether fees are waived on renewal; if not, consider looking for a different lender.

You may also be able to refinance 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 are loans that are specifically issued to fund the purchase or repair of equipment or inventory. The equipment or inventory acts as collateral to secure the loan.

If you are seeking additional funding to finance the purchase or repair of equipment or inventory, this kind of financing may be a better option. Instead of automatic daily or weekly repayments, 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 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.

Learn more about invoice factoring

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 shoring up cash flow, covering unexpected expenses, or financing growth. With a monthly repayment schedule, this form of financing may be easier to manage compared to multiple or large daily automatic withdrawals.

Reputable lenders will not engage in predatory practices like merchant cash advance stacking. When issued by a reputable 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.