MCA Default Notice: What It Means and How to Respond

Thank you for visiting Delancey Street. This article is about the MCA default notice you may have received, what it means, and how to respond to one. Now, a merchant cash advance default notice looks scarier than it is, but it has real implications. It’s a letter from the funder, not a court order. No judge has looked at it. Nobody has proven anything. But it’s also the trigger that starts a fast chain of events, and most of what happens is usually outside of the courtroom. Understanding that difference is the whole game and helps you understand and contextualize what’s about to occur next.

At Delancey Street, we deal with business owners at exactly this moment, usually a few days after the first daily or weekly payment has bounced. Borrowers such as yourself will typically get an MCA default notice and wonder what this means. The purpose of this article is to explain exactly what this notice actually does, what comes next, and what you can actually control.

What the notice actually says

Here’s what the notice actually says and why that number is so big. Almost every MCA agreement has an events of default section and a remedy section. This is just standard practice. The default notice is the funder invoking both. It’s doing two things. It’s declaring that you’re in default, and it accelerates the deal and the total payback.

Acceleration and the demand number

Acceleration is the number that typically shocks people. In this situation, you’re not being asked for the missed payment. You’re being asked to pay the entire unrepaid amount, which is the full purchase receivables figure, not the cash you got. For example, if you took out $50,000 at a 1.45 factor rate, the purchased amount is going to be approximately $72,000. If you’ve paid $30,000, the notice will ask for approximately $40,000 right now, plus default fees, NSF fees, and often they may even include an attorney fee in there.

Often, business owners freeze because there’s a big gap between what hit your bank account and what the letter actually demands. In addition, we’ve noticed that often these punitive fees will add an additional amount equal to 10 to 30 percent of your overall balance on top of what you owed.

Read the remedy section closely

Now, what’s important is for you to read the remedy section closely. Some agreements will claim the right to enforce the personal guarantee immediately, to notify your customers that you’re in default, and to charge a flat default fee written as a fixed dollar amount.

Most common triggers in these contracts

The most common triggers in these contracts are very narrow and more mechanical than people actually expect.

• For example, a returned or failed daily or weekly payment, sometimes just one, can trigger this.

• Another trigger can be blocking the funder’s ACH access.

• Another example could be changing or closing your bank account without any consent from the lender, or switching credit card processors without informing the lender.

• Another example could be taking a new advance from another funder, which most agreements ban outright.

• Another example could be a material misstatement in your application.

Two things materially matter here. First, many agreements separate breach, which can come with a cure period, from an event of default, which often has no cure period at all. Second, some of these triggers have nothing to do with whether you can pay. For example, if you block ACH to buy yourself a week, this can be considered an event of default in most contracts, and it hands the funder a clean breach. That’s typically a self-inflicted wound we see constantly at Delancey Street.

Sequence after the notice

What does the sequence after the notice? The realistic order of events looks like this.

That usually will cover your accounts and receivables. And this is the part that can hurt you both financially and reputationally, and it doesn’t require a judge at all.

UCC Article 9 notification to your account debtors

Under UCC Article 9, a secured party or assignee can send an authenticated notification to all of your account debtors, meaning your customers, telling them to pay the lender instead. Once a customer receives a notification of this, they can refuse to pay you and instead route that money to the lender. That’s a real legal mechanism, and it’s not a bluff. It’s something that lenders actually lean heavily on in order to get money from you.

Payment processors will also get contacted at this point, and processors at this point will often either hold or reserve funds under their own merchant agreements, which is a contract decision rather than a court order. What that really means for you is now your cash flow has been cut off and you are now suffocating, financially speaking.

Judgment and confession of judgment in New York

Only after all of this is done, or perhaps even alongside it, will the funder file a lawsuit. Typically speaking, in order to seize actual assets, they will need a judgment. In New York, once a judgment exists, a restraining order can be served by the lender’s attorneys with no court order, and it binds the bank in the same way that an injunction does. Before they get that judgment, no such power exists.

Now, some people in the past may have heard about a confession of judgment. In the past, this allowed funders to get a judgment in New York within days against businesses anywhere in the country. New York amended this in 2019 to bar filing a confession of judgment against a defendant who is not in New York State. If you are a New York business, though, you are still exposed.

Reconciliation clause and recharacterization

Now, if you get a default notice, typically speaking, you’re at the end of the road and there’s very little available to you because you have already done something which contractually puts you in a situation of default. Typically, we recommend pre-default remedies such as invoking the reconciliation clause, which is where the real leverage usually lives pre-default.

A true MCA is a purchase of future receivables, not a loan. That distinction, though, only holds up if the funder actually carries risk when your revenue drops, and that’s what the reconciliation clause is intended for. It gives you a contractual right to request an adjustment in the remittance, meaning your daily or weekly payments, which tracks the real revenue your business is generating.

Courts are constantly examining the recharacterization look at whether the repayment of the MCA was truly contingent, whether a reconciliation right was existed and honored, and how the term and remedies were structured. If reconciliation is missing or ignored or made practically impossible to use, then the argument is that the deal is really a loan. Once it’s a loan, state usury caps come into play. As of this moment, this is an interpretation, not a settled rule. Outcomes vary state by state, by contract, and more importantly by the record you’ve built. We typically recommend business owners try their hardest to invoke the reconciliation clause and make it so the lender is the one who has defaulted on the agreement.

What you should be doing in the first week

If you’re at risk of defaulting, here’s what you should be doing in the first week.

• You should be pulling the complete agreement, every addendum, and get notice of all the personal guarantees that you may have signed.

• Read the default section and the remedy section line by line.

• At this point, you should be pulling 12 months of bank data and build a real documented financial picture of your business.

• Send a written reconciliation request if the clause allows it, and keep proof of delivery.

• It is important that you do not block the ACH because that will qualify as an automatic default on your part.

• You should also search the UCC filings in your state and list every position and every filing date.

• We highly recommend you call your customers before the funder does, so a notice from them does not mean the first contact they’ve established.

Typically speaking, we see business owners making a few phone calls and then giving up. We highly recommend you document this through email and through sending physical mail a number of times until the lender refuses to honor it or you’ve built such enough of a track record where you can show that you tried your level best to invoke the reconciliation clause.

Then you should either pick a lane. You should either try to reconcile, negotiate a restructuring of the debt, settle, defend, or look at Chapter 5 bankruptcy, subchapter 5 bankruptcy.

Things that really change the outcome

Now, here are the things that really change the outcome for you.

• For example, if your revenue really fell and you can prove it, then you should do so and try to invoke the reconciliation clause.

• If your guarantee is a full payment guarantee or a narrower performance or validity guarantee, this can also help you.

• Another variable is the venue, the choice of law, and the arbitration terms.

• How many positions are stacked and who filed first?

All of these questions will decide what the ultimate strategy becomes. And most importantly, it’s important to keep track of whether you have any collectible assets at all, because a funder’s appetite to litigate tracks recovery, not the principal.

Treat the balance in the letter as an opening position

A default notice is the start of a negotiation that the funder has staged. The demand number is inflated by acceleration and punitive fees. But the receivables notice, the UCC lien notices, can do real damage reputationally and financially for your business. Typically speaking, the businesses that come out of this intact are the ones who can move quicker rather than in weeks. They have documented their revenue honestly, and they’ve avoided handing over a clean breach and default of the agreement. You should treat the balance in the letter as an opening position rather than a fixed debit, debt, and attempt to negotiate this.

At Delancey Street, we help business owners nationwide. We encourage you to get a risk-free consultation today.