Stacking means taking a second merchant cash advance while a first one is still being repaid. Sometimes a third. It is one of the most common ways a business that was merely short of cash ends up in serious trouble, and it happens often enough that we would rather write about it than pretend it does not.
This is a post arguing against selling you something. We think that is the right way round.
How businesses end up stacked
Almost nobody sets out to hold three advances at once. It happens gradually.
You take an advance for a good reason. A month or two later the original problem has not fully resolved, or a new one arrives, and the daily holdback is now taking a slice of revenue that used to be available. Cash feels tighter than before. At exactly that point, a broker calls offering more money, approved quickly, with no requirement to clear the existing balance first.
The offer solves this week. It makes every week after it harder.
What a second advance does to your daily cash
This is the part that catches people out, because the arithmetic is not obvious until it is happening to you.
An advance is repaid as a percentage of your sales, collected as they come in. That percentage is called the holdback. One advance at a fifteen percent holdback leaves you eighty five percent of your revenue to run the business with.
Add a second advance at a similar holdback and you are not paying fifteen percent twice in sequence. Both are collecting from the same revenue at the same time.
A worked example.
A shop takes $10,000 a week. One advance at a 15% holdback collects $1,500, leaving $8,500 to cover stock, wages, rent and everything else.
A second advance at 15% collects another $1,500 from the same $10,000. The business now has $7,000 a week to operate on, a 30% reduction in available cash, with no increase in sales to pay for it.
If a third is added at the same rate, weekly operating cash falls to $5,500. At that point most businesses cannot make payroll without borrowing again, which is how the spiral sustains itself.
The total you owe has not changed on either advance. Your ability to trade while repaying them has changed enormously.
The contract problem
There is a second risk that sits underneath the cash flow one. Many merchant cash advance agreements contain a clause prohibiting you from taking additional funding against the same revenue without written consent.
Taking a second advance can therefore put you in breach of the first agreement. Depending on the wording, that may allow the original funder to demand the full outstanding balance immediately. A business already struggling with two holdbacks is rarely in a position to pay a lump sum on demand.
Check your existing agreement before you speak to anyone about additional funding. If you cannot find the clause, ask your funder directly.
Warning signs you are being pushed toward it
Brokers earn commission on funded deals, and some are not fussy about what happens afterwards. These are the signals worth paying attention to:
- You are contacted out of the blue shortly after taking an advance, sometimes within days
- You are told the existing balance does not matter, or nobody asks about it at all
- The conversation moves quickly to how much you can get and away from what it will cost
- You are discouraged from telling your current funder
- Nobody asks what the money is for
That last one matters more than it sounds. A funder who does not ask what the money is doing is not assessing whether it will work.
What to do instead
If you are partway through an advance and need more capital, there are better routes than adding a second one.
- Speak to your existing funder first. Many will consider a renewal, where the existing balance is settled and replaced with a single larger advance. One holdback instead of two. This is usually the cleanest option and it is often available earlier than businesses expect.
- Ask about restructuring. If the holdback is the problem rather than the total, some funders will look at adjusting the collection percentage. You do not get this by going quiet.
- Look at whether the need is actually short term. If the same gap keeps reappearing, more short-term funding is treating a symptom. Invoice factoring, a term loan or a line of credit may fit the underlying pattern better.
- Get the cash flow picture on paper. Working out what the business genuinely needs, and when, frequently reveals that the number is smaller than the offer on the table.
If you are already stacked
Talk to your funders. Both of them, and early. The instinct is to say nothing and hope trading improves, and it is the wrong instinct in every case we have seen. Funders have far more room to work with a business that comes to them before payments start failing than one that goes silent and then defaults.
If the position is beyond that, speak to a licensed insolvency trustee or a business advisor. Neither of those calls is an admission of failure. Both are considerably better than another advance.
How we handle it
We ask about existing funding on every application, and we say no when the numbers do not work. An advance that a business cannot trade through is not a good deal for anyone involved, including us.
If you are considering additional funding and want a straight answer about whether it makes sense, the conversation costs nothing.
Frequently asked questions
Is stacking merchant cash advances illegal?
No. It may put you in breach of your existing funding agreement, which is a contractual matter rather than a legal one, but the practice itself is not illegal in Canada.
Can I take a second advance from the same funder?
Usually this would be handled as a renewal, where the existing balance is settled and rolled into one new advance. That leaves you with a single holdback and is a different thing from stacking.
How many advances is too many?
Two concurrent advances is enough to put most small businesses under real pressure. There is no safe number, because what matters is the combined holdback against your actual operating costs.
Will my funder know if I take another advance?
Very likely. Additional collections appearing in your bank account are visible, and funders in this market talk to each other. Assume it will be noticed.
What if a broker says stacking is normal?
It is common, which is not the same as advisable. Ask them to explain what your combined holdback will be as a dollar figure per week, then decide whether you can trade on what remains.
For Canadian Business Owners
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