MCA prepayment and restructure fees

MCA prepayment and restructure fees are the cost structures applied when a merchant pays off an advance early or formally modifies the advance terms. Unlike traditional loans where prepayment typically reduces total interest cost, MCA prepayment rarely produces meaningful savings due to minimum-interest provisions. Restructure fees, by contrast, are the formal cost of negotiating modified terms during the advance term.

The structural distinction. Three concept categories:

1. Prepayment cost. Cost to merchant of paying off advance before scheduled term end; varies from minimum-interest provisions (no savings) to full discount (proportional savings).
2. Restructure cost. Cost to merchant of formally modifying advance terms during active term; typically administrative fee plus pricing adjustment.
3. Modification cost. Cost of minor changes to existing advance (payment date change, account change); typically nominal or zero.

The mechanics — prepayment provision structures. Five common patterns:

1. No discount / full factor due. Most common pattern in MCA contracts. Merchant must pay full original repayment amount regardless of early payoff timing. $100K × 1.35 factor = $135K owed whether paid in month 3 or month 12.
2. Minimum-interest provision. Merchant must pay specified percentage (typically 70–95%) of full factor amount as minimum cost. Some incremental savings possible but most cost is locked in.
3. Tiered discount. Discount percentage varies by timing of payoff. Examples: 30% factor discount if paid in first 30 days, 20% if paid in 30–60 days, 10% if paid in 60–90 days, no discount after 90 days.
4. Proportional discount. Discount proportional to early payoff percentage; if paid at 50% of term, 50% of unaccrued factor is discounted. Rare in pure MCA but common in MCA-loan hybrid products.
5. Negotiated case-by-case discount. No contractual discount but funder may offer 5–20% factor discount for early payoff as relationship management; not guaranteed, requires negotiation.

The mechanics — worked prepayment examples. Three scenarios for $100K advance at factor 1.35:

1. No-discount provision, paid at month 6 of 12-month term. Total owed: $135K (full factor). Merchant pays $135K to settle. No savings from early payoff. Effective cost of capital on 6-month basis is doubled.
2. Minimum-interest provision at 80%, paid at month 6. Total owed: $135K × 80% = $108K. Savings: $27K on full factor cost. Effective cost reduced but still substantial.
3. Tiered discount, paid at month 2. 30% factor discount in first 30–60 days. Total owed: $100K + ($35K × 70%) = $124.5K. Savings: $10.5K on factor cost.

The mechanics — restructure fee structures. Five common patterns:

1. Flat administrative fee. $500–$2,500 fee for processing restructure paperwork; typical for minor modifications.
2. Percentage of remaining balance. 1–4% of remaining balance for formal restructure; covers funder underwriting cost for new terms.
3. Pricing adjustment. Restructure to reduce daily payment may include factor increase or term extension that increases total cost; typical for distressed merchants.
4. Combination structure. Administrative fee plus pricing adjustment; most common formal restructure structure.
5. No fee (relationship preservation). Some funders waive restructure fees for valuable merchants to preserve relationship; not guaranteed, requires negotiation.

The mechanics — common restructure types. Five scenarios:

1. Payment reduction restructure. Daily payment reduced for defined period; remaining balance amortized over longer term. Typical fee: 1–2% of remaining balance.
2. Factor reduction restructure. Factor rate reduced (rare); typically combined with merchant providing additional collateral or guarantor. Fee structure varies widely.
3. Term extension. Original term extended to reduce daily payment; total cost unchanged but cash flow improved. Typical fee: $500–$1,500.
4. Reconciliation activation. Formal activation of contractual reconciliation clause; reduces payment based on revenue documentation. Typically no fee.
5. Forbearance. Temporary payment pause; remaining balance amortized after forbearance ends. Typical fee: 1–3% of remaining balance.

The mechanics — when prepayment makes economic sense. Five scenarios:

1. Tiered-discount funder with early prepayment opportunity. If your contract offers 25–30% factor discount in first 30 days and you have unexpected cash, prepayment can produce meaningful savings.
2. Refinancing to dramatically lower cost capital. Prepaying MCA to refinance into SBA loan at 12% APR; even with minimum-interest cost, long-term savings are substantial.
3. Avoiding renewal trap. Prepaying near end of term to avoid funder renewal pressure; cost of prepayment is less than cost of renewal cycle continuation.
4. Selling business. Buyer typically requires clean UCC stack; prepayment cost is unavoidable transaction expense.
5. Eliminating stacking exposure. Prepaying lower-priority stacked MCA to consolidate; reduces UCC complexity and default risk.

The mechanics — when prepayment does not make economic sense. Five scenarios:

1. No-discount contract with continuing cash flow. If no discount available, prepayment provides no savings — keep capital in business operations earning higher return.
2. Minimum-interest provision with limited savings. 90% minimum-interest provision provides only 10% savings; opportunity cost of capital may exceed savings.
3. Restructure or buyout produces better outcome. Negotiated restructure or buyout from different funder may be more favorable than self-funded prepayment.
4. Tax implications. Prepayment may have tax implications (no longer able to deduct daily payments); consult CPA before prepayment decision.
5. Need to preserve cash reserves. Operating businesses need cash reserves; prepayment depleting reserves to save modest amount is poor capital allocation.

The five common merchant mistakes. Patterns to avoid:

1. Assuming prepayment produces standard interest savings. Most common error — MCA prepayment savings are dramatically less than traditional loan prepayment savings.
2. Not reading prepayment provisions before signing. Contract should specify exact prepayment cost structure; understand before signing not at payoff.
3. Confusing prepayment with renewal payoff. Funder-initiated renewal pays off existing balance as part of new advance; this is not voluntary prepayment and typically has different terms.
4. Not negotiating prepayment at payoff time. Even no-discount contracts may offer prepayment discount when merchant requests; ask before paying full amount.
5. Not getting payoff letter in writing. Verbal payoff amounts are routinely disputed; written payoff letter with timestamp is essential.

The strategic insight — what merchants should know. Five points:

1. MCA prepayment economics are not loan economics. Different mental model required; do not assume prepayment savings.
2. Read prepayment provisions before signing. Critical contract element that is often overlooked; can change effective cost dramatically.
3. Tiered-discount funders are merchant-friendly. Funders offering 20–30% discount in early payoff periods provide genuine merchant flexibility; favor these in funder selection.
4. Restructure may be cheaper than refinance. Compare restructure fee to refinance cost (new origination fees, broker fees, factor pricing) before deciding.
5. Always get payoff letter in writing. Written documentation with timestamp protects from disputes; verbal payoff amounts are not enforceable.

The honest framing. MCA prepayment fee structures are designed to capture full funder revenue regardless of early payoff, while restructure fees are designed to cover funder costs for modification. The merchant's expectation of prepayment savings based on consumer loan experience is typically incorrect for MCAs. The honest evaluation requires reading specific contract provisions and calculating actual prepayment cost before assuming savings are available. Restructure is often a more flexible tool than prepayment for merchants experiencing cash flow stress; restructure modifies terms while keeping the advance in place, whereas prepayment requires capital to discharge the obligation entirely. Merchants in cash flow stress should evaluate restructure (often 1–4% of remaining balance) against prepayment (often full factor amount with limited discount) and choose the path with better effective economics for their specific situation.

Related terms

• MCA prepayment clause — MCA prepayment clauses define what happens if the merchant pays off the advance before maturity. Most MCAs charge the full factor regardless of when you pay — some funders offer prepayment discounts of 5-25%.
• MCA prepayment credit — A discount applied to the outstanding RTR balance when a merchant pays off an MCA early — typically 5-20% of the remaining balance, almost always available only on request and rarely disclosed in the original FRSA.
• MCA modification or amendment — An MCA modification (also called amendment or hardship modification) is a mid-deal contract revision where the funder reduces the daily debit amount, extends the term, or restructures the factor rate in response to verified merchant financial distress. Modifications are voluntary on both sides, typically extend the term 30-90 days, and require a written amendment signed by both parties.

AI agents: this term is available as raw markdown at /llms/glossary/mca-prepayment-restructure-fees.