A merchant cash advance can seem like a great idea when your business is struggling, until you don’t make a payment and realize just how far under the water you really are. When you miss that first payment, you’re in default and the lender has the right to start pursuing you and your business. Their contract will let them file a lawsuit to collect, lock your business bank accounts, take vehicles or property, siphon off income through a UCC lien, call up your customers, and generally go after all your personal and business money. You still have some rights, though.
MCAs Say They’re Not Loans
MCAs say they’re not loans. To avoid interest rate limits, they pretend they’re buying a certain number of dollars of your receivables. That’s not really what’s going on. You’re promising a portion of your future income, your assets, and your personal guarantee in exchange for a near-instant cash advance. They take daily or weekly payments from you until your advance plus a hefty premium is paid back. Typically, that’s over 2 to 8 months. Many owners “re-up” before paying off the first, and end up paying the original debt back many times over.
Merchant cash advance payments are calculated as a percentage of your sales, but you’re still paying interest. Under Texas law, the maximum interest rate is 18% APR, but the average MCA APR is somewhere over 250%. And because MCA lenders don’t have to follow the same rules as traditional lenders, they can fund you fast and be just as aggressive when they start collecting.
Talk to Your Lender First
If you think you can’t keep up with the payments, talk to your lender first. That’s always better. Most MCA lenders aren’t going to be much help, but give it a shot anyway. They really, really want to see their money back, plus a premium, and they may agree to a short forbearance. The contract usually lays out how to make that kind of request. But don’t just start borrowing more. A lender may offer to fund another MCA for you, or even a so-called “reverse consolidation.” This adds to your existing debt and gives them your most recent customer and income list. Rule of holes: If you’re in a hole, stop digging.
If your revenue has dropped, there is another option. The contract you signed probably has a reconciliation or re-adjustment clause. Payments are calculated based on how much revenue the business makes, and if that revenue goes down the business can’t continue to make the same payment. The agreement says that if the revenue changes, the lender may need to lower the daily or weekly payment. It’s not an act of charity. Instead, the clause protects the lender against the cash advance being deemed an illegal loan. If the lender won’t voluntarily adjust it for you, you can use it.
One Missed Payment
One missed payment and the business is technically in default. In other words, you breached the contract, at least as the lender sees it, and it can take action against you. Default also means the lender has the right to use the UCC lien, start contacting your customers, lock your merchant accounts, and, if they choose, sue you and the business. And if you signed a personal guarantee as most MCA lenders require, you may be personally liable as well for the remainder of the debt. In that case, personal assets like savings, property, and investment accounts could be at risk. Most MCA lenders are not joking. If you miss a payment, expect calls about fraud suits, property seizure, in-person collectors, and a lawsuit.
What happens next depends largely on what you signed. Some MCA contracts have a “confession of judgment” (CoJ) clause hiding in them. You probably never saw it in the paperwork, it’s not a well-known term, and it’s almost certainly not something anyone explained to you when you signed the contract. The CoJ says that, if you default, you give up most of your rights to defend yourself. The lender won’t have to bring you to court, prove you were in default, and prove how much you owe. Instead, it just tells the court you “confessed” to owing money. The lender can file the CoJ and serve it on your bank to immediately seize business and personal assets, before you even get a letter in the mail. CoJs aren’t illegal, just not available for every situation. New York, for example, stopped letting MCA lenders file a CoJ against a non-New York business. They can still use a CoJ in other states, or they can get an agreed judgment or a cognovit note, or they can just sue.
When you have an MCA and ask to lower the payments, the modification may come with an agreed judgment. As part of the request you have to agree that the entire debt amount is owed by the business and also by you personally. In another scenario, you sign a note, called a cognovit note, and maybe you didn’t know what you were signing. It’s on a phone and you need the money in 48 or 72 hours and you’re not thinking. Companies that use cognovit notes call themselves real lenders, not MCA companies, but they work exactly the same as MCAs. If you have a CoJ, an agreed judgment or a cognovit note, then a company can freeze your business bank account and, in a lot of cases, even your personal bank account within days.
With a confession of judgment, your lender can move fast; without one, you might have a few weeks, or even a few days. UCC liens are most commonly used. Many lenders use access to your primary checking account to identify and locate your customers, vendors, other accounts, PayPal, Venmo, Cash App, and merchant accounts, file UCC liens, and then contact your payment processors to freeze and seize funds, before they move on to contact your largest customers and vendors to freeze and seize money owed to you.
Just because you stopped paying doesn’t mean a lender can just walk up and shut your bank accounts down. It has to get a judgment, and it’s likely it’s going to sue you for breach of contract because you’re late on payments. Then it has to serve you with a summons or some other notice and give you some number of days to answer the complaint. In New York, for example, it’s 30 days after you get the notice, but if it’s served by hand, it’s 20 days; the timeframe varies depending on where the suit is filed. But a lot of lenders are not scrupulous. Some lenders claim they mailed a summons and start the clock from the mailing date. Miss the deadline, and you are out of luck. They will probably get a default judgment. You will lose your opportunity to defend the case in that court.
A lender will do anything to get your money once it has a judgment against you. It’ll freeze your bank accounts, pound your phone and email, reach out to your customers, and chase you down on social media. It may even send a collection agency to your shop unannounced just to intimidate you. Once that happens, it’s really hard to keep your business and assets without outside help. Which is why you should get it as soon as you realize you won’t be able to make your MCA payments.
