This puts an even bigger squeeze for cash on the subcontractor
And this is where MCAs become an inescapable trap. If the borrower is struggling to make the payments, most brokers will try to set them up with another MCA. A second MCA is about half of the amount advanced originally and can be offered by the current lender or through another company. In the MCA world, this is referred to as “stacking” and can bring a situation from bad to worse.
Instead, the business owner (who is already dealing with a huge drop in personal credit score) is told that the only option they have is to take out another MCA
If even a single payment is missed (most often, because the account was overdrawn) the borrower can be considered in default and be charged additional fees or other penalties. Further, each MCA can (and will) place a UCC lien on the business. As long as those are in place, other lenders such as banks or factoring companies will not provide funding that could pay off the bad debt and get the business back on track.
Finally, many MCA companies will include a Confession of Judgement in their agreements, meaning that as soon as the borrower defaults, the company can file the confession in court. Within a matter of hours, the borrower can find its bank accounts frozen. Some MCAs will even start calling around to the general contractor requiring immediate payment of the advance.
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The nature of the construction business in terms of payments and finances make Merchant Cash Advances particularly risky. Let’s talk about the reality of how subcontractors get paid on commercial construction projects:
A contractor’s costs are often more than they are able to collect from their invoice to a GC or owner, especially in the first one to three months on a job. Invoices are only sent once per month, and after the invoice is approved, the contractor has to wait 30-45 days to be paid.
When the invoice is paid retainage is held back by the owner of the project – typically 10% of the total invoice. Retainage is held until the whole project is finished. So, the contractor only gets 90% of what they invoiced for the month. In some instances, a GC may not release payment to the subcontractor until they know all of the sub’s suppliers and vendors have been paid in full.
Despite these facts, the contractor has to pay their own employees every week, their suppliers when they pick up the materials, or if they have terms with the supplier then perhaps it is only a deposit at first and the balance in 30 days. Either way, it is still before they are actually paid from the project.
- (a) take one payment per month
- (b) only on the day that the sub-contractor is paid from the project(s)
- and (c) only if that month’s costs are less than what the subcontractor is actually being paid
For example: A concrete contractor working on a five-story building can bill a certain portion of the contract each time a floor is poured. Imagine if the contractor spent their first three weeks on the project at the end of one month, but the actual concrete pour wasn’t until the start of the following month. In this example, the contractor would have incurred nearly 100% of the cost of the floor but received none of the revenue associated with it.