Stacking in the context of merchant cash advances (MCAs) refers to the practice where a business takes out multiple cash advances from different lenders at the same time. While this can provide immediate financial relief, it often leads to significant long-term challenges for the business.

Impact on Borrowing Capacity

Stacking multiple MCAs reduces a business's ability to borrow more in the future. Each cash advance comes with its own set of terms, fees, and high interest rates. When a business stacks these advances, it increases its debt obligations significantly. Lenders view this as a red flag, as it indicates financial distress and a higher risk of default. Consequently, the business might find it challenging to secure additional loans or advances from cautious lenders.

Effect on Debt Service Coverage Ratio (DSCR)

The DSCR is a key metric used by lenders to assess a business’s ability to repay its debts. It is calculated by dividing a business's net operating income by its total debt service. Stacking MCAs severely impacts the DSCR. As the business takes on more debt through stacking, its total debt service increases, potentially lowering the DSCR. A lower DSCR is a warning sign for lenders, suggesting that the business might not generate enough income to cover its debt obligations.

Cash Flow Implications

MCAs are typically repaid through a fixed percentage of daily or weekly credit card sales. This repayment structure can strain the cash flow of a business, especially when stacked. With multiple advances being repaid simultaneously, a significant portion of the business’s revenue is directed towards debt repayment, leaving less cash available for operational expenses and growth investments. This situation can lead to a cycle of dependency on further advances to maintain cash flow, exacerbating the financial strain.

Risk of Business Shutdown

The cumulative effect of reduced borrowing capacity, lowered DSCR, and strained cash flow can lead to a precarious financial situation. In extreme cases, it can even result in the shutdown of a business. The constant outflow of cash to service multiple debts can erode the operational stability, making it difficult for the business to sustain its operations.

The Solution: Consolidation and Cheaper Funding

A viable solution to the problem of stacking is to consolidate the multiple advances into a single loan with a lower interest rate. This strategy can reduce the overall debt burden and simplify the repayment process. By paying off the stacked positions with a cheaper funding option, businesses can improve their cash flow, enhance their DSCR, and potentially restore their borrowing capacity. It is a strategic move towards stabilizing the financial health of the business and avoiding the pitfalls of stacking.

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While stacking MCAs might seem like an easy fix for immediate cash needs, it can have detrimental effects on a business’s financial health. It impairs borrowing capacity, lowers the DSCR, strains cash flow, and in severe cases, can lead to business closure. Therefore, businesses should approach stacking with caution and consider consolidation into cheaper funding options as a more sustainable financial strategy.

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