In The News

Introduction & Welcome

Cynthia Lavin: Well, good morning everyone. My name is Cynthia Lavin. I am the VP of communications and community engagement for the BBB serving Southeast Florida and the Caribbean. I am the person in charge of the communications for our BBB, the marketing, and the community outreach with different partners and organizations to bring our BBB some great content in terms of education. That is why we're here today.
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I want to introduce today's presenter, Mr. Richard Lowe. He is the person in charge of marketing at Coastal Debt Resolve. He has been with the company about a year but has been in the financial services sector for over 20 years. He is very well-versed in this topic and will be presenting about navigating the commercial debt crisis. I would like to ask everyone if they have questions to please put them in the chat or the Q&A, and we will wait till the end to answer those. We will also be sharing with you some assets you can use along with the presentation. Thank you so much for your time today, and I'll let Richard take over.
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Richard Lowe: Thank you very much, Cynthia. Welcome everybody to the Better Business Bureau's webinar about the debt crisis businesses are facing across the United States. As Cynthia just mentioned, my name is Richard Lowe. I am with Coastal Debt Resolve. We are a proud accredited member of the Better Business Bureau.
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This webinar is entirely intended to help business owners understand the current debt environment here in the United States, understand high-cost commercial financing, the pressures it can put on cash flow, and ways for you to navigate out of those debt situations. Just to be clear, the Better Business Bureau does not endorse Coastal Debt Resolve or any specific financial product provider or debt relief solution. This is entirely intended for education. To get started, the Federal Reserve puts out really great information throughout the year. In particular, the SLOOS report, which is the Senior Loan Officer Opinion Survey on Bank Lending Practices. That is a fantastic resource. If you're unfamiliar with it, it comes out every quarter. Unfortunately, in Q2 of this year, it came out with some pretty unsettling information.
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How Big is the 2026 Commercial Debt Crisis?

We've seen here in the United States that non-financial business debt has reached an all-time high of $24 trillion. Non-financial business debt doesn't include insurance companies or banks; these are businesses that offer a product or a service. Obviously, 24 trillion is a very large number, but I think we're all pretty used to having large numbers thrown at us, so we are going to make sure we put this into context for you.

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If you look at this chart here, this is from the Board of Governors of the Federal Reserve System via FRED. The green area represents corporate businesses (large companies), and the blue area represents non-corporate businesses. It is scaled in millions, so this 24 represents 24 trillion. Right away, you can see the steep angle of the climb in debt. That right there is concerning, seeing how quickly it's running up. But another detail that came out of the SLOOS report in Q2 was that commercial and industrial lending standards, along with small business credit demand generally, were unchanged during the quarter. So it begs the question, how is the debt running up this high if funds and demand for funds are less accessible and the demand for it is lessening? We're going to explore exactly why that's happening.

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For that, we have to go back in time a little bit. I'm sure all of you remember during the pandemic the disaster relief loans, the PPP loans that came out. Then banks were loosening up money; money was more available. But in 2021, they discontinued those programs, and we did go through an extended period where banks were restricting lending severely. So again, where is all this money coming from? Where is all this debt coming from if banks have been more restrictive about lending since the pandemic programs ended in 2021?

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Why are Small Businesses Shifting to Alternative Financing?

The conclusion is that businesses are getting money from alternative capital, alternative financing products like merchant cash advances. These are instruments that a lot of businesses aren't very familiar with. They don't understand them very well, so that's going to be part of our topic today: providing a better understanding of those sorts of alternative financing options.

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But before we get into that, let's continue to dive into the current debt situation. This is a stacked area chart. Let me break this down real quick. This blue band represents mortgages, which are loans secured directly by properties. This light blue line represents traditional commercial and industrial loans. Private credit loans are non-bank loans that are typically issued to very large corporations. Then this band right here is the one we really want to focus on: other loans and advances. This includes PPP loans, the Paycheck Protection Program loans, and EIDL loans, along with alternative instruments like merchant cash advances. This final category, debt securities, are tradable financial assets such as a corporate bond issued by a corporation.

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What we really want to look at when we look at this chart is the width of these bands, most notably the "other loans and advances." You can see as the pandemic approaches in 2020, the band begins to widen. The PPP and EIDL loans can certainly account for that widening. But again, in 2021, they discontinued those programs, so you would expect this band to start to narrow out. Instead, it continued to stay wide. If anything, we're seeing it widen further here. It does seem like there is now a lasting shift towards businesses turning to high-cost alternative debt.

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Why Does Traditional Business Loan Timing Fail SMB Cash Flow Needs?

If this debt is high cost, what is it that appeals to businesses in the first place? It could simply be the accessibility of the funds, but there's more to it than that. There is a liquidity gap for a lot of businesses. For many businesses, they get a contract today, but won't get paid on that contract for perhaps 60 days out. Let's say that you're a business and an essential piece of equipment has broken on you, and you don't have the money to buy that equipment yourself. You're going to seek capital. But a traditional bank loan typically funds 30 to 60 days out. That is the liquidity gap when that business needs the money to buy that piece of equipment now. Instruments like merchant cash advances often offer very quick funding, maybe even the same day. Merchant cash advances are filling that liquidity gap for business owners. While it solves the problem for them right then and there, later on, the cost of that debt can put a lot of pressure on cash flow.

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How is the Post-Stimulus Reality Driving Business Bankruptcies?

That leads me to this particular slide, which is really the reason why this webinar is happening. When the pandemic was happening, the government was issuing lots of financing to businesses at very affordable prices with the PPP and EIDL loans. We saw Chapter 11 bankruptcies in 2022 drop down to 4,429. But since then, in the 12-month span leading up till June of this year, we've seen Chapter 11 bankruptcies jump up to 10,320. That is a 133% surge.

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This is a trend that we cannot allow to continue here in the United States. We need to reverse this. Small businesses are the backbone of our economy. You employ I don't know how many people. This has to change. The reality is that higher borrowing costs and high-cost financing put additional pressure on debt service and increase insolvency risk. That is the particular concern here, especially for that small business in the example I gave that needed a piece of equipment right away. They already had a constrained cash flow; they wouldn't have been able to buy that piece of machinery themselves. Instead, they had to get a merchant cash advance, and they're the ones most vulnerable to the cost of that debt down the road. The solution to this is education. People need to understand how these alternative debt instruments work.

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What is the Difference Between an MCA and a Traditional Business Loan?

There are many different types of them, but a merchant cash advance is one of the more complex ones. I'm going to take a moment here to compare and contrast a traditional business loan with a merchant cash advance to give you some perspective. Whereas a business loan typically is based off of credit, a merchant cash advance is structured very differently. It's typically a purchase of a company's future revenue at a discount, so they're advancing you the money. That difference is critical to understand because since an MCA is structured in that fashion, it means that a lot of MCAs are not regulated by the same rules and laws that loans are. It changes things quite a bit.

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How Do Factor Rates Compare to Traditional APRs?

As opposed to an APR with a traditional business loan, merchant cash advances often use a specified purchase amount. It's a preset amount that you're paying for it, often referred to as a factor rate. That has to get paid no matter what. Whether you pay it off tomorrow or in 3 months, that amount you've agreed to has to get paid in full. There is no early payoff benefit. We will come back around to that. Whereas a business loan might give you years to pay back that debt, merchant cash advances can often be very short-term, some of them as short as 3 months. You're expected to pay that back in full in that 3-month period. Another critical detail that's different is that with a traditional business loan, you expect to pay once a month for that loan.

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What is the Cash Flow Impact of Daily ACH Remittances?

Many merchant cash advances are structured in a fashion where they are able to deduct money directly from your business account via an ACH on a daily basis, Monday through Friday. For a business owner who hasn't read the agreement and doesn't know that that's how the payment schedule works, this can catch them off guard. If you were planning on paying a bill on Wednesday and were counting on the funds in that account being there to make that payment, you might come along on Wednesday and the money is not there due to the ACH remittances to the MCA company. It's very important, especially when calculating cash flow, to understand the payment schedule.

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Whereas a business loan may ask for collateral like a piece of real estate, you need to read the agreements on a tool like an MCA because they can try to secure the debt in a number of different ways, including a variety of different UCC filings and even possibly personal guarantees. You have to read those agreements carefully. And then the other big difference is something I already mentioned: a business loan may take 30 to 60 days to fund your account, whereas an MCA can fund accounts very quickly, maybe in the same day. Those are some critical differences between the two instruments, and hopefully, it's giving all of you some more context as to how this works. Putting it simply, business debt is a complex thing. There are so many different debt instruments out there that it can be very difficult for a business owner to clearly understand how they work.

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What Are Real-World Scenarios of MCA Debt?

We've talked about the spike in bankruptcies. We've talked about how much debt there is out there. Let's look at a couple of real-world scenarios of businesses that have accumulated a number of merchant cash advances. This is an example of a very real commercial cleaning company that was paying over $2,900 a week on a $17,000 debt. This is an example of a cattle farmer that was paying more than $6,000 per week on a $23,000 debt. And this is a real estate developer that was paying more than $18,000 a week on a $512,000 debt. As a business owner, you can imagine making these payments on a weekly basis and how that would impact your business, just to give everybody some additional context on how this works. So, what are the steps that you can potentially take to never find yourself in this position where you're facing a form of financial hardship? Or if you are facing financial hardship, what are some of the things that you can try to do to navigate your way out?

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How Can Small Businesses Maintain Control of Cash Flow?

One of the most important things we're always talking to our clients about is understanding cash flow. It's incredibly important to understand all the incoming revenue that your business is going to have coming in. Understand all of your operating expenses and any debt service obligations. Mind-map it out, whatever you have to do, but know to a penny exactly what your cash flow is, and you might just find that the money that you need exists within your business. Again, I mentioned this before: you've got to read the agreements. Some of these merchant cash advance agreements include clauses like a confession of judgment, which is an attempt to have a business owner waive their right to defend themselves in court, or blanket liens. You've got to read the agreements and know exactly what it is that you're getting into before you accept the debt.

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Why Do Debt Stacking and Reverse Consolidations Fail?

If you're thinking about addressing debt with new debt—if you're going to get new debt to pay old debt—really consider that first. Will those additional costs begin to compound? Is it really a solution right now, or are you creating a long-term problem for yourself by taking on that additional debt?

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Businesses are in all different sorts of stages. For a business that is in the stage of scaling, certainly having a marketing budget is absolutely essential. But for a business that's facing financial hardship, that's become overwhelmed by debt, it's hard to say that they're truly in a scaling phase. You need to prioritize what expenses need to get paid to keep your business open. Identify what those things are. If you have to push expenses like a marketing budget aside until you resolve the problem, then so be it. And again, as I said earlier, business debt is very complex. It's far more complex than consumer debt is. There are all different sorts of debt instruments. There are all different sorts of creditors. Every business finds themselves in a unique situation. There is nothing wrong with reaching out and seeking professional help and guidance and allowing somebody to evaluate your situation to help give you guidance.

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Let's talk about options outside of bankruptcy because that's what we're looking to change: the increase in bankruptcies. What are some of the real options for a business that is facing true financial hardship? As I said earlier, you can consider taking on additional financing. But understand that in consumer debt, you might be able to get a consolidation loan where you consolidate all of it and pay a lower interest rate; finding the equivalent of that in the business world is not as easy. These instruments are different, so consolidating all of them is challenging. Make sure that if you're going to take on new debt, you understand how that's going to impact your long-term cash flow, and understand the payment schedule.

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You should understand the costs and fees. You've got to read the agreement. Some of these debt instruments not only have interest but also have factor rates, origination fees, underwriting fees, and other types of fees. Make sure that you clearly understand the cost of that additional debt. The payment schedule is important. If you already have daily remittances coming out of your business account and you take on a new advance that's also going to take out daily remittances, understand that payment schedule—it really impacts a business's cash flow. Also know that with a lot of this alternative high-cost financing, like merchant cash advances, there is no early payoff benefit. As opposed to a traditional business loan where if you pay it off early, you pay less for it, with a lot of these instruments, whether you pay it back tomorrow or in 3 months, you owe what you owe. Again, you've got to read the agreements.

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How Does Commercial MCA Debt Restructuring Actually Work?

The other option is debt settlement. There are certainly costs associated with debt settlement programs. They are very time and resource-intensive. The fees will vary depending upon how many creditors you have, what type of debt you have, how much debt you have, and if we have to get lawyers involved. But one way or another, when you speak to a debt settlement company, they should 100% break down every cost with you before you enroll in the program. It should all be very transparent. Set aside the fees to the debt settlement company: when you're going with debt settlement, you still have to make payments to your creditors. You already have agreements in place to pay them, so they need to see that you're working in good faith. You still have to make payments to a dedicated settlement account. Those payments may have been restructured to something that your company can afford, but one of the most critical elements of graduating from a debt settlement program is making continued payments and showing that you're working in good faith to the creditors.

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As far as settlement timing goes, again, that's going to vary depending upon the business. It depends upon how many creditors you have and how much debt you have. Outcomes are not guaranteed. And then you have to remember that this is business. You get knocked down, you get back up. A business that's facing financial hardship has been knocked down. Getting up is challenging. You've got to come in ready to fight. There are a lot of things that can happen. There can be a breach of the agreement. Litigation can certainly happen. You have to be ready to come in and fight, and you want to work with a company that's ready to fight beside you.

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As we approach the end of the webinar here, as Cynthia mentioned at the beginning, you should all be receiving an email with a survival guide: "Five Questions You Must Ask Before Taking on Alternative Financing." Keep your eyes open for that. But also, if your business is dealing with merchant cash advance debt or business debt in general, and you want a free consultation, feel free to call Coastal Debt Resolve. This is what we do. We are strong negotiators. We will help you understand your particular position and give you the best guidance that we possibly can. In summary, I can't emphasize enough that we need to change the trend in bankruptcies in this country, and education is the key to doing that. Read the agreements, understand what you're getting into. That's the smartest thing that you can do. On behalf of the Better Business Bureau and Coastal Debt Resolve, thank you very much for joining the webinar. As I understand it, we might have some questions. Cynthia.

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Live Q&A and Final Thoughts

Cynthia Lavin: Yes. So, now is the time for questions. Anything that you may want to ask Richard about what he presented. It's a small group, so there's an opportunity there to take questions. I don't see anything on the Q&A or the chat. Feel free to type those questions in now. I'll give everybody a minute or so. And if we don't have questions, then we will go ahead and wrap up for the day. You will receive the survival guide that was kindly provided to us, and feel free to contact Coastal Debt at your leisure.

We would like to thank Richard and Coastal Debt for their support of BBB and their support of our Torch Awards for Ethics. We're going to be opening that up soon. So, please be on the lookout for any information regarding the Torch Awards application, venue, and date. We're getting ready to start that process all over. Ethics is important, and choosing ethical businesses is important, and that's what BBB is here for. I do not see any questions. So, thank you everyone for taking the time to join us today. Again, please be on the lookout for more webinars, more education from BBB, and have a great rest of your day. Thank you, Richard.

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Richard Lowe: You're welcome.