Welcome to Delancey Street. The objective of this article is to help business owners like yourself, who are on Google, and need help understanding what happens when you stop paying an MCA. This is not a simple answer. The objective is not to give you a simple 1,2,3 answer like every other generic article on the internet. The objective is to give you a nuanced answer so you understand, how complex this is.
You’re probably in a situation: The daily debit bounced this morning and you’re doing math on how many days you have. You saw this coming from a mile away, but you thought you had more time, but unexpected expenses came, and now the business is going between red and black. If you’ve stopped paying a merchant cash advance, or you’re a week out from it, the thing nobody tells you is that the default didn’t start when the ACH came back NSF. It started earlier. Probably the day the balance ran too low in the account they pull from, or the day you took the second advance to cover the first. The paperwork just caught up. Many people at this point want to try and restructure their MCA debt.
The default already happened
Most owners think missing the payment is the trigger for an MCA default. It isn’t, not usually. Read the events-of-default section of whatever you signed and you’ll find a list – changing your depository bank, rerouting card receipts, taking another MCA position and stacking, or letting the balance sit too low to clear the debit. Any one of those can be a breach of the contract, which can automatically result in you defaulting on your MCA. You can be in default with every payment made on time. Many agreements are set up so that it is VERY easy for you to be considered in default, and for automatic fees to kick in.
What that breach unlocks is acceleration – most people don’t know this clause is often in their agreement. A typical agreement doesn’t say you owe today’s $640. It says the full uncollected purchased amount – the RTR, the number on page one minus what you’ve paid down – comes due in a single shot the moment they declare default. So the $71,000 you had spread across the next eleven months of daily pulls becomes $71,000 due now – automatically, contractually speaking, plus default fees, plus their attorney’s fees written in at some percentage you never negotiated if legal kicks in to the picture. They don’t have to sue first to flip that switch. Declaration that you are in default of the MCA is enough. The lawsuit, when it comes, is there to collect the accelerated number, not to establish it or discuss it – everything is contractual, and automatic, and you agreed to it when you signed the agreement.
Your business credit takes a hit somewhere in here, which by this point is the least of it.
Notices to your customers
One of the things that happens when a default gets declared is that UCC liens are filed. Notices are sent to your clients, and the redirect does more damage than the lawsuit, and it’s quieter. When you took the advance you sold them your future receivables, and Article 9 of the UCC lets the buyer(the MCA company) of receivables tell the people who owe you to pay them instead of you. That’s a 9-406 notice – account-debtor notification – and it goes to your processor, your commercial customers, the platforms that remit to you. The letter says the receivables belong to the MCA lender now and payment should be directed to them. Your customer’s AP department, and legal department doesn’t want a fight with somebody’s lawyer, so they comply, and the money you were counting on Friday lands in the funder’s account. Often the legal department of the customer will agree that the vendor has no choice but to reroute the payments. If this is done on their end, this chokes the receivables off in a day or two. You keep invoicing your clients and the funds land somewhere else and the lender gets paid, not you.
Why changing banks doesn’t change what you owe
So, now you’re in a situation – money is choked off, your revenue is dropping because it’s getting redirected – and some owners consider opening an account at a different bank. Changing banks does not change what you owe, and it can make things worse. When you onboarded, the funder pulled read-only access to your bank feed through Plaid or one of the other payment aggregators – to verify deposits before funding, and to keep watching them after. Many people don’t know that this access can continue long term. Closing the old account doesn’t kill that credential. At a lot of banks it re-links to the new account under the same online-banking login, and they can see the new deposits inside two days. So a new account does not reset anything.
The debits keep coming too. Your ACH authorization may be re-presented, sometimes more than once in a day, and sometimes under a company name you may not recognize on the statement.
Many people don’t realize switching the account can itself be a default under many contracts. To a funder it may not read as hardship. It may read as bad faith or even fraud, which can speed up how the file moves and often means acceleration.
Changing a bank account or payment processor does not remove the underlying obligations and may have contractual consequences. We can help organize your cash-flow information and discuss proposed terms with your funders. Independent counsel can explain legal questions about receivables, liens, or payment arrangements. Some funders may also run test transactions on an e-commerce website to see who is processing the payments.
Can they come after me personally?
Often, yes. Most MCA agreements carry a personal guarantee. A PG generally means the obligation isn’t only the LLC’s, it can be the signer’s too – your house’s equity, your personal accounts, and the guarantor’s name on a judgment. Many people don’t even know this clause is in their agreement, but it’s usually there. Business-level changes generally don’t release the person who signed. The funder may pursue the guarantor regardless of what happens to the company. If you open your contract now, or contracts(if you have multiple MCA’s stacked), you will likely see that most of them have a personal guarantee.
The confession of judgment is the other thing owners panic about, and in New York it’s mostly defanged for out-of-state merchants since the 2019 change to the COJ rules, so funders lean on the guarantee and an ordinary suit instead. But COJ rules vary by state, and some funders may use COJs in states where the rules are more favorable to them.
Where the leverage is on a merchant cash advance
One question that can matter is whether the contract was ever a true purchase at all. New York courts run a three-factor test out of LG Funding v United Senior Properties – second department, 2020 – to decide whether one of these is a true sale of receivables or a loan wearing a costume. They look at whether the payment actually adjusts to your real revenue, whether there’s a set repayment schedule, and whether the funder kept recourse against you if the business simply dies.
The reconciliation demand
A related, practical issue is the reconciliation request. Many contracts say that when revenue drops you can ask them to recalculate the daily payment or weekly payment to the agreed percentage of actual deposits you’re getting. Independent counsel can review how the reconciliation clause in your contract works and how requests are made. Some funders respond slowly or ask for many documents before any adjustment happens. A reconciliation provision that exists on paper but never works in practice is one of the things some courts have pointed to in calling an agreement a loan.
