Falling behind on a merchant cash advance can feel overwhelming. What really scares clients is what comes next: can they rebuild their credit? At Delancey Street we negotiate with MCA funders and other business creditors for owners under this kind of pressure, and the first thing we tell them is that a default is serious, and while a default does not erase your credit history, it does require careful planning and may require you to work with a financing partner who does not rely solely on your credit score. Most people focus on the immediate pressure, not the long-term plan, so it helps to start with what a default actually is.
Delinquency and Default
When you sign a cash advance agreement with a provider, that agreement spells out your payment obligations. Those terms might include specific dates, amounts, or other conditions that must be met. A default happens when your business fails to meet the remittance terms set by your financing provider. Once you are there, the provider may add fees or increase your rates. It can also report the default to the credit bureaus, which usually lowers your credit score. The overall impact may vary based on the contractual terms, so you need to check your agreement.
Delinquency and default are sometimes used interchangeably by owners, but they have distinct meanings. Delinquency is the early warning sign; it begins the moment you miss a scheduled payment. Some providers give a grace period to avoid delinquency, and you may still remedy the missed payment with late fees during this time. Default follows delinquency. If the delinquency continues, you run the risk of default, which is a far more serious breach of your agreement. From a practical standpoint - especially for business owners - understanding both is important.
Whether your financing was secured or unsecured also shapes what comes next. An unsecured loan has no collateral behind it. These loans are primarily assessed by the creditworthiness of the borrower. After default, the lender has no collateral to “go after” immediately, but can pursue legal recourse against the borrower. If you signed a personal guaranty, the stakes are high. The guaranty makes your personal assets vulnerable, and can dramatically impact your personal credit rating. Lenders commonly require the borrower to provide a guaranty from the outset on unsecured loans. A secured loan is backed by collateral; your assets. Think machinery or inventory. After a default the lender has the right to seize and liquidate the collateral to recover the loan.
Many owners carrying MCA debt also have an SBA loan, so a word on those. If you default on one, you are on the hook for the lender’s loss. Many SBA loans are collateralized, and that collateral can be liquidated. Keep in mind that the SBA is not your lender, it is merely guaranteeing up to 85% of the loan. If the lender makes a call on the SBA guarantee, you are probably facing wage garnishment by the SBA or a frozen bank account.
Your Personal Credit Can Be Affected by a Business Default
Then there is the question almost every owner asks us: will this follow me home? You may have heard that business and personal credit are separate, but in some cases your personal credit can be affected by a business default. There are 3 issues to consider. The first factor is the structure of your business. If you’re a sole proprietor, your personal credit is going to be negatively impacted by a default. The second factor is the structure of your loan. In many cases, personal assets are used to secure financing for your business. If your business defaults on the loan, you risk losing those assets and your personal credit score may also be damaged. Make sure you understand the loan structure and how it can impact your personal finances before you sign any contract. The third factor is how the default was handled. If it results in the business filing bankruptcy, you may also be forced to file for personal bankruptcy. That would have a massive impact on your credit score.
So how do you rebuild? It’s important to start with your business finances. Take a look at your cash flow statements and make sure you have enough money to cover your upcoming remittances. If your cash flow is healthy, it’s best to continue making these payments on schedule. One of the biggest mistakes entrepreneurs do is to ignore their cash flow statement. When cash flow is good, nobody pays any attention. As long as there is money in the bank, nobody cares about numbers on a page. That habit has to end.
Get in contact with your lender or funder. It’s important to communicate with them and be open and honest. Honest communication with your lender or funder may result in options like renegotiating terms or developing a payment plan. Consider alternative lenders with flexible financing options. You might be surprised at what’s available!
After dealing with the immediate issues, it’s time to rebuild your business’s creditworthiness. Make on-time payments on your other debts, keep your credit balances low and regularly check your credit reports. It’s challenging, but with the right strategy and tools, business owners can work toward financial stability.
Being on the precipice of default — or past the brink is never fun. It doesn’t mean you’ll never get business financing again, though. It means that you will have to be strategic and find a partner that is capable of looking past your credit history. Delancey Street is a business debt settlement firm. Our senior debt advisors negotiate on your behalf with MCA funders and lenders for less than the full balance. We never try to sell you another loan. We are not a law firm. If bankruptcy or litigation is your best option, we will refer you to an independent attorney. Get a free, confidential first consult. If we can’t help you, or there’s a cheaper option, we will tell you on the first call.
