At Delancey Street, the owners we talk to after a merchant cash advance default often ask some version of the same question: the funder has my account tied up, so can I just open a new one at another bank? It would depend on the contract that you signed. Legally, the contract is clear. In practice, however, there are a lot of folks who get into trouble over this.
To see why, look at how an MCA is paid back. The funder buys a share of your future revenue, called the Purchased Amount, at a discount, and pays you the Purchase Price in cash. In other words, the funder gets part of your gross revenue. That revenue is collected by ACH withdrawals from the borrower’s bank account. These withdrawals are intended to equal Specified Percentage x Revenue, on a daily or weekly schedule. Your bank account is the pipe the whole deal runs through.
Event of Default
That is why the contract cares so much about it. Almost every MCA agreement contains provisions for what constitutes an “Event of Default,” and several involve the owner’s bank account. Interruption of the funder’s ACH debits is one. Too many bounced debits for insufficient funds is another. It can also be a default to make changes to the bank account without letting the funder know, to close the bank account without notifying it, or open or use another business account without telling it. Notice that in each of these the trigger is acting without notice to the funder.
Here’s the thing: opening or using another business account without the funder’s knowledge can itself be an Event of Default. It doesn’t erase the debt. You personally guaranteed the debt, which means the funder can come after you. When you take an advance with a personal guarantee, your business will suffer if it defaults, and you’ll suffer too. Business owners must understand that moving accounts doesn’t solve the problem.
Can’t meet your next payment to the MCA provider? Then the funder can enforce its UCC lien against the business’s assets, including clients and customers. It can do that without a court order. It can also sue you in state or federal court on your contract and personal guarantee. And the MCA provider can do both - file and enforce its UCC and file and pursue a lawsuit for breach of contract and on the personal guarantee. Sometimes, at the same time. The warning signs vary: customers who say they received letters from the funder asking them to pay the funder, not you; or you get a Summons and Complaint; or no summons, just notice that your bank account is frozen.
You should not ignore an MCA lawsuit if an MCA funder sues you for money. When you get a summons (notice of a lawsuit) you should respond to prevent a default judgment. A default judgment is when the business and anyone who’s personally guaranteed the MCA is found liable without the court ever hearing from you. Some funders also forum shop, forcing a legal dispute to be settled in a forum (court) that’s more favorable to them, regardless of the location of the client/business.
You can’t hide from your invoices, assets and cash flow by changing banks. Without dealing with the debt itself, all this shuffling the deck chairs or moving the furniture around isn’t going to help you.
So what else can be done if you have a merchant cash advance in default? Start with the nature of the deal. An MCA is a legal agreement intended to be contingent on revenue. The funding company takes the risk that they will lose the full amount of the advance if the business shuts down or fails. For this reason, an MCA agreement should include a reconciliation provision and be for an indefinite term. If the funder runs afoul of the terms of the agreement or treats the deal like a loan by refusing to reduce the payments or fixing the terms of the advance, the agreement may be recharacterized as a loan which could also constitute a violation of state usury laws.
Adjust the Payment to Match the Revenue
If sales have slowed, ask the funder to reconcile, and adjust the payment to match the revenue. There are two MCA terms that tend to be confusing: “reconciliation” or “true up” and “Adjustment”. A true up is required when the funder has collected more from a borrower than they were entitled to and must refund the over-collection. The Adjustment (sometimes also called a reconciliation) forces the funder to reduce its weekly or daily payment to match a borrower’s downturn. If the funder asks you to send over accounts receivable reports or invoices, you are required to do so. Without a request, you typically do not have to keep sending them. If the business fails for lack of revenue, you should tell the funder, if possible with proof. If the business fails or stops generating receivables, the MCA should no longer be owed. Depending on the agreement, there may be grounds not to pay if the funder breached the agreement, committed fraud, or did other wrongdoing.
It is also worth checking what the funder has done. Some refuse to reconcile, debit the account two, three or even four times, or collect more than the Purchased Amount. Stacking makes things worse: since MCAs are really expensive, the business owner often has to take more advances just to cover the payment. The funder will usually charge a penalty if you default because of stacking.
So, can you open a new bank account after defaulting on a merchant cash advance? Maybe. Only if it doesn’t breach the contract, anyway. The legal answer may be obvious but is not always the practical answer. Trust us, if you tried to dodge the funder’s debit by opening a new business bank account without telling them, it would only make things harder. But for now, ask yourself: How are you likely to get out of the debt? Do you have a plan?
At Delancey Street, we are a business debt settlement company, not a law firm. Our senior advisors negotiate with MCA funders and lenders for less than the full balance owed, and when litigation or bankruptcy is the better call, we refer owners to a vetted independent attorney. The first consultation is free and confidential.
