Looking for business debt relief services? Visit Delancey Street.

Using Retirement Funds to Eliminate Merchant Cash Advance Debt

Merchant cash advances can provide quick funding for small businesses, but they often come with high fees and interest rates. As debt stacks up, business owners may consider tapping retirement savings to eliminate this expensive debt. However, raiding retirement funds to pay off debts involves navigating complex rules and tax penalties.

What is a Merchant Cash Advance?

A merchant cash advance provides a business with a lump sum of capital in exchange for a percentage of future credit card sales. It works similarly to a business loan but doesn’t require a strong credit score or collateral.
The catch is that merchant cash advances charge very high effective interest rates, often over 50% APR when fees are included. And the daily repayment structure can drain cash flow quickly if sales dip.

Can You Use Retirement Funds to Pay Off Merchant Cash Advances?

Technically, yes – retirement accounts like 401(k)s and IRAs allow early withdrawals or loans to pay off business debts under certain circumstances. However, heavy tax penalties and the risk of harming long-term savings make this an option of absolute last resort.

401(k) Hardship Withdrawals

401(k) plans may allow employees to take hardship withdrawals to cover immediate and heavy financial needs. These include:

• Medical expenses
• Costs to prevent eviction or foreclosure
• Funeral expenses
• Expenses to repair damage to a primary home

The IRS also allows 401(k) hardship withdrawals specifically to pay off business debts – but only if the money is used to pay business expenses necessary to continue operations.
Eliminating past merchant cash advance debts may not qualify under this rule. However, some plans do allow hardship withdrawals if funds are used to pay off debts and loans that funded business operations.

401(k) Loans

If allowed by the plan, employees can borrow up to $50,000 or 50% of their 401(k) balance as a loan – whichever is less. These 401(k) loans avoid taxes and penalties but must be repaid with interest over 5 years.
Using 401(k) loan proceeds to pay off merchant cash advances could help eliminate this debt. Just beware that failing to repay the loan converts it to a taxable distribution.

IRA Withdrawals

Money from traditional IRAs can also be withdrawn early to pay off business debts, although similar rules and restrictions apply. Notably, IRA withdrawals taken prior to age 59 1⁄2 face a 10% early withdrawal penalty along with income taxes.

Should You Use Retirement Funds to Pay Off Merchant Cash Advances?

Tapping retirement savings to eliminate debt may seem like a quick fix. But this strategy involves major financial tradeoffs:

Loss of Retirement Assets

Using retirement funds now reduces assets earmarked for the future. Lost retirement savings and compounded growth over decades can mean a lower standard of living later.

Taxes and Penalties

IRA withdrawals and 401(k) hardship distributions face federal and state income taxes plus a 10% early withdrawal penalty if taken prior to age 59 1⁄2. 401(k) loan defaults also trigger income taxes and penalties.

Harming Cash Flow

Retirement account loans require regular repayments with interest. Without cash flow to make these payments, loans can default and trigger taxes and penalties.

Risk of Bankruptcy

If tapping retirement savings leaves a business still struggling to pay off debts, bankruptcy may still result. This outcome would negate the entire purpose of raiding retirement funds.

Alternatives to Using Retirement Funds

Before taking the drastic step of putting retirement at risk, consider safer alternatives for paying off merchant cash advances:

Debt Consolidation

Banks or online lenders may extend more affordable consolidation loans allowing merchants to pay off cash advances at lower interest rates. This reduces payments while keeping retirement intact.

Working with the MCA Provider

Asking merchant cash advance providers for modified repayment terms could create some breathing room. While not guaranteed, extensions or lower payments may be possible.

Business Loans from Family

Borrowing from family or friends sidesteps taxes and penalties while posing less long-term risk than retirement withdrawals. Just be sure to put loan terms in writing.

Cutting Business Expenses

Getting lean to boost cash flow pays off merchant debts faster while avoiding retirement withdrawals. Steps like trimming staff, inventory, marketing or equipment costs help improve the bottom line.

Increasing Sales

Ultimately, the fastest way out of merchant cash advance debts is increasing sales revenue. While easier said than done, even modest gains combine with expense cuts to improve cash flow.

Get Legal and Financial Advice

Tapping retirement funds to pay off business debts is extremely complicated. Consult qualified legal, tax and financial professionals to understand all impacts before proceeding.
The attorneys at Delancey Street offer a free consultation to business owners struggling with merchant cash advance debts. Their team can provide tailored advice on how to legally eliminate this debt while protecting retirement savings.

In Summary

Using retirement funds to pay off merchant cash advances is allowed but risky. Heavy tax penalties, loan repayment burdens, and the chance of still needing bankruptcy make this an absolute last resort option. Safer alternatives like debt consolidation loans, negotiating with MCA providers, borrowing from family or increasing sales exist. Still, get professional advice beforehand. The attorneys at Delancey Street help business owners find the best path to safely eliminate merchant cash advance debts.