With food and labor costs rising and foot traffic flat or falling, many operators have been tempted to take out merchant cash advance loans to provide quick funding to cover balance sheet gaps.
But MCA loans come with a catch: They can be costly and require payments regardless of how a business is doing. MCA loans have contributed to a handful of high-profile bankruptcies in the past year. Subway franchisee MTF Enterprises said MCA loans led to significant financial problems that drove it to file for bankruptcy in February. A Del Taco franchisee, Matadoor Restaurant Group, declared Chapter 11 bankruptcy last year after its revenue could not keep up with its MCA obligations.
While MCA loans can result in financial constraints, Nathan Mor, director of settlement operations at Coastal Debt Resolve, said they don’t always cause problems for restaurant owners and can work well when used properly and not to cover up ongoing liquidity issues.
Mor has worked with restaurant owners to help them navigate MCA debt before bankruptcy is the only option.
Restaurant Dive spoke with Mor to learn more about what an MCA is and how it works and how restaurant owners should think about this type of debt.
Editor’s note: This interview has been edited for clarity and brevity.
RESTAURANT DIVE: What exactly are merchant cash advances and why might a restaurant owner use them?
NATHAN MOR: A Merchant Cash Advance (MCA) is typically structured differently from a traditional loan. It is a purchase of a restaurant’s future credit card and cash receipts at a discount. In practice, the MCA provider gives the restaurant an upfront lump sum, and in exchange, they automatically deduct daily or weekly payments, regardless of how much revenue the restaurant brought in that day or week.
Instead of a traditional loan, restaurant owners typically use MCAs because they are fast and accessible. Approvals are often based strictly on bank statement deposits or invoices instead of personal credit scores, and they require much less documentation. When a walk-in freezer fails, a slow season hits, or payroll is short on a Friday, many operators simply don’t have the luxury of waiting weeks for a traditional bank approval. MCAs can fund as fast as that same day, and are sometimes conveniently embedded directly into the restaurant's point-of-sales system as a pre-approved offer.
Why are they problematic for restaurant owners and how do they erode capital?
MCAs are not a problem for every restaurant owner. They can be, and are, used effectively all the time. However, the core issue is the structural misalignment between how a restaurant makes money and how an MCA lender collects it.
Most restaurant owners don’t fully realize how expensive the capital actually is, because the MCA is not usually presented like a traditional loan that accrues standard interest. In many instances, it utilizes a high-frequency repayment structure via daily or weekly Automated Clearing House withdrawals. Restaurants operate on notoriously thin profit margins (often 5% to 10%), but an MCA typically requires a holdback of 10% to 20% of gross daily sales.
When a business starts losing a fixed amount off the top line every single day, it erodes the capital needed to cover inventory, labor, rent, marketing and taxes. Instead of the capital helping the business grow, owners may be forced into a cycle of borrowing more just to pay their existing balances, which can quickly strain operational stability.
What should owners consider before taking out an MCA?
Before taking an MCA, restaurant owners really need to ask themselves one critical question: Is this money solving a temporary problem, or is it covering a deeper operational issue? If food costs are rising or revenue is inconsistent, expensive short-term capital usually magnifies the problem rather than fixes it.
Operators must mathematically model the daily cash flow impact and review the total payback amount. You have to ask yourself: If my gross receipts are reduced by 15% every single day for the next six months do my daily payment obligations leave enough breathing room to actually operate?
Additionally, it is important to evaluate the total repayment amount and overall cost of capital over the life of the advance. Because the advance is paid back daily over a short term, the effective cost of capital can be significantly higher than many traditional financing products, and there typically isn’t a discount for paying them off early. Fast money can become very expensive money if there’s no clear repayment strategy attached to it.
What are better options for debt relief before bankruptcy is the only option?
The instinct for many operators facing a cash-flow crisis is to either look for another high-cost bridge loan or immediately consult a bankruptcy attorney. But bankruptcy is not always the first option businesses should explore when there are practical ways to recover.
Before considering bankruptcy, operators may explore commercial debt restructuring and settlement programs. In my experience dealing with business owners, the business itself is often still producing solid revenue. The problem is not the actual debt, but the speed at which these creditors want the debt paid back. It becomes too quick for the cash flow to sustain.
Restructuring involves bringing in a third-party specialist to analyze the balance sheet, audit daily outflows and assist with creditors. It is designed to adjust the pace of those repayments, reduce financial pressure, and help improve cash flow management while keeping the business solvent.
How can restaurant owners restructure or settle their debt without going into bankruptcy?
Debt settlement can be more effective when business owners take action early, rather than waiting until the problem becomes too large to manage and their operating accounts are drained. Bankruptcy, particularly Chapter 11, can be expensive, highly public, and can damage essential vendor relationships.
Restructuring, on the other hand, can be a private, negotiated process. Through professional MCA debt relief, account managers work with clients throughout the negotiation process. Often, lenders may prefer negotiated resolutions to forcing a business closure where recovery becomes uncertain.
A structured settlement plan can often reduce overall balances and give the restaurant time to rebuild healthy cash flow. The key to successfully navigating this without bankruptcy is transparency, realistic budgeting, and having a strategy focused on long-term sustainability instead of short-term survival.
