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Merchant Cash Advance Breach of Contract – What Happens If You Default?

Merchant cash advances (MCAs) have become an increasingly popular form of financing for small businesses in recent years. Unlike traditional small business loans, MCAs provide quick access to capital by advancing money against a business’s future credit card sales.But what happens if your business defaults on an MCA agreement? Can the MCA company sue you for breach of contract?Let’s break it down.

How Do Merchant Cash Advances Work?

First, it’s important to understand what an MCA is and how it differs from a regular small business loan.With an MCA, a funding company provides you with a lump sum of cash upfront. In exchange, you agree to pay back a fixed percentage of your daily credit card and debit card sales over a set period of time – usually 4-12 months – until you pay back the advance plus a fee.So for example, if you get a $50,000 MCA with 15% fees, you would pay back around $57,500 over 12 months by allowing the MCA company to withdraw 15% of your daily card sales automatically.The key thing that makes MCAs different than loans is that MCA companies claim they are purchasing a percentage of your future receivables, not lending you money. This distinction is made to avoid being categorized as loans and running afoul of state lending and interest rate caps.

What Happens If You Miss MCA Payments?

Now, let’s say your business runs into financial trouble a few months into your MCA agreement. Maybe sales dropped unexpectedly or an emergency expense came up. And you aren’t able to make your daily payments anymore.Unfortunately, the moment you miss a payment, you are technically in default of your MCA contract. Even a single missed payment constitutes a breach of contract according to most MCA lenders.And once you default, the MCA company has the right to take legal action to recover what they are owed.

What Happens After A Business Defaults on an MCA

There are two main ways an MCA lender can come after you legally if you default:

1. If the MCA Company Has a Confession of Judgment

Many MCA contracts contain what’s called a “confession of judgment” or “cognovit note”.This gives the MCA lender the right to go directly to court and obtain a judgment against your business for the full amount owed without any notice to you or ability for you to defend yourself.So the day after you miss a payment, the MCA company can simply walk into court with your signed contract containing the confession of judgment. The court will then enter a judgment against your company, which the MCA lender can then use to:

  • Freeze your bank accounts
  • Garnish your receivables
  • Seize assets like equipment
  • Damage your business’s credit

Obviously, confessions of judgment are extremely dangerous provisions for small business owners. Unfortunately, they are buried in the fine print of many MCA agreements.

2. If the MCA Lender Does Not Have a Confession of Judgment

If your MCA contract does not contain a confession of judgment, the lender’s recourse is to sue you for breach of contract in civil court.In this situation, at least you would receive notice of the lawsuit and have a chance to respond and defend yourself before a judgment is entered.The MCA company may try to claim the full amount owed per the original contract terms. Or they may sue only for the amount advanced plus reasonable fees based on what you repaid so far.If the court finds you breached the agreement, you would be ordered to pay damages, which could include:

  • The remaining balance
  • Interest
  • Late fees
  • Legal costs
  • Court costs

This judgment would also negatively impact your business’s credit rating. And the MCA provider could pursue aggressive collection tactics to recover what they are owed.

What Happens After a Judgment Against Your Business

Whether the judgment comes via confession of judgment or a breach of contract lawsuit, the aftermath is similar.With a court judgment in hand, the MCA company has broad authority to forcibly collect directly from your business’s bank accounts and merchant processors via wage garnishment, levies, or asset seizure.Specific assets at risk include:

  • Bank accounts – Any business or personal bank accounts could be frozen and the funds withdrawn.
  • Accounts receivable – Your credit card processor may be ordered to remit a percentage of daily sales to the MCA company.
  • Equipment – Valuable equipment like vehicles or machinery could be seized and sold.
  • Real estate – If you own your commercial property, they may be able to place a lien or force a sale.

Facing aggressive collection efforts like bank levies and wage garnishment can rapidly spiral a struggling small business into bankruptcy.So if at all possible, you want to avoid breaching your MCA contract or allowing a judgment against your company.

What Should You Do If You Default on an MCA?

If your business has already missed MCA payments or you anticipate an imminent default, get help right away.Speaking with an experienced small business debt relief attorney is crucial to understand all your options and formulate a game plan. An attorney can advise you on the best course of action based on your specific situation.In certain cases, they may be able to negotiate an alternative repayment plan or settlement with your MCA lender to avoid further legal action. Or if a lawsuit has already been filed, they can defend you in court to potentially have the judgment dismissed or reduced.There are also bankruptcy options like Chapter 11 reorganization or Chapter 7 liquidation that could eliminate or reduce the debt owed under your MCA. A small business bankruptcy lawyer can let you know if this is a viable path forward for your company.The key is acting quickly at the first signs of distress to avoid allowing the situation to spiral out of control. Because once an MCA lender has a judgment in hand or has started seizing your assets, it becomes much more difficult to negotiate or recover.

Conclusion

Getting a merchant cash advance can help ease short-term cash flow issues for a small business. However, failing to repay an MCA as agreed can open up your business to aggressive legal collection efforts.Within days of a missed payment, an MCA provider could have a court judgment against you or start freezing bank accounts and seizing valuable business assets. So if you anticipate struggling to make payments on your MCA, consult an attorney immediately to understand all your options before further action is taken against your company. In many cases, an experienced lawyer can help protect your business by negotiating alternative repayment plans, defending against lawsuits, or advising on bankruptcy filings if necessary.

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What Happens With A Merchant Cash Advance Breach Of Contract

Merchant cash advances (MCAs) have become a popular form of financing for small businesses in recent years. Unlike traditional small business loans, MCAs provide an upfront lump sum of cash in exchange for a percentage of future credit card sales. This can help businesses access capital quickly without having to qualify based on credit scores or financial history.However, MCAs also come with risks – especially if your business struggles to keep up with the fixed daily or weekly repayment amounts. A missed or late MCA payment puts your business in default of the contract. This gives the MCA lender the right to take legal action to recoup their investment.So what actually happens when you breach an MCA contract? Let’s break it down step-by-step:

You Miss An MCA Payment

The first sign of trouble is a missed or late MCA payment. MCA contracts require fixed payments on a daily, weekly or monthly basis. The specific schedule and amounts should be clearly outlined in your agreement.If you miss making a scheduled payment, you are technically in default of the MCA contract. The lender will usually start with phone calls and emails demanding payment. But this quickly escalates if the default continues.

The MCA Lender Sends A Default Letter

Within a few weeks of the initial missed payment, the MCA lender will send an official default letter. This letter reiterates that you have breached the MCA agreement and are now subject to the default clauses and remedies in the contract.The letter will include the total past due amount and demand immediate payment. It may also threaten further legal action if the default is not cured quickly (usually within 7-14 days).

The Lender Files A Confession Of Judgement

Many MCA contracts contain what is known as a “Confession of Judgement” (COJ) clause. This gives the lender the right to obtain a judgement against your business without even filing a lawsuit.The COJ allows the lender to literally walk into court with just your signed contract in hand. No notice to you is required. The court simply enters a judgement for the lender based on your prior signed confession.With a judgement in place, the lender can then aggressively pursue repayment. This includes asset seizures, bank levies and wage garnishments against your company and/or its owners.

The Lender Files A Breach Of Contract Lawsuit

If there is no COJ clause, then the MCA lender must file a formal breach of contract lawsuit and obtain a court judgement the standard way. This involves filing a complaint outlining how you violated the MCA agreement, serving you with notice of the lawsuit, and asking the court to award them damages.Lawsuits take time – often 3-6 months from filing to resolution. But once the lender secures a judgement, they can pursue all the same aggressive collection tactics as if they had a COJ. Expect legal fees and interest to accrue on top of the judgement amount too.

The Lender Places A UCC Lien On Your Business

Many lenders will also file a UCC lien against your company as soon as you default. The UCC (Uniform Commercial Code) allows lenders to put a public lien on your business assets and inventory. This gives them priority access over other creditors if you end up filing bankruptcy.A UCC lien can be filed with just a few forms and a small fee. No lawsuit or court order is required. The presence of a lien on your company’s public record will also wreak havoc on your business credit score.

The Lender Garnishes Your Bank Accounts

Armed with a judgement (whether from COJ or lawsuit), the MCA lender can legally garnish your bank accounts. In most states, they can seize business or personal accounts.The lender simply serves your bank with a writ of garnishment directing them to freeze funds in your accounts and turn that money over. This leaves you unable to access cash to keep your struggling business afloat.

Other Aggressive Collection Efforts Ensue

Judgements also open the door for MCA lenders to pursue other aggressive collection efforts like:

  • Placing liens on your real estate or physical business property
  • Issuing subpoenas to customers demanding they redirect payments to the lender
  • Attempting to pierce your corporate veil to go after owners’ personal assets
  • Serving you with endless document/information subpoenas to identify seizable assets
  • Getting court orders to seize vehicles or equipment at your business locations

As you can see, an MCA default kicks off a cascading series of consequences – all aimed at squeezing repayment from your struggling business. Without legal help, most small companies cannot survive this onslaught.

Getting An Injunction To Halt Collection Efforts

Thankfully, there are defenses business owners can assert against predatory MCA lenders. The first step is requesting an emergency injunction from the court.A temporary injunction will order the lender to halt all collection efforts against you and your business. This “timeout” then gives you leverage to negotiate a settlement or restructure the debt.Injunctions are granted when there is evidence of unconscionability or unfair business practices by the lender. Examples include failing to adjust payments when your revenues decline, misrepresenting terms in the origination process, or charging usurious interest rates in violation of state laws.

Negotiating A Settlement

The next step is trying to negotiate an amicable settlement with the MCA lender. This will ideally involve reduced lump sum repayment and/or a payment plan that works with your current revenues.If negotiations fail, then you can raise affirmative defenses and counterclaims asking the court to void the contract and dismiss the lender’s judgement. Defenses here include fraud, usury violations, breach of good faith & fair dealing duties, and more.

Declaring Bankruptcy As A Last Resort

If legal defenses fail and you simply cannot afford to pay, declaring bankruptcy may be your last option. Under Chapter 7 or Chapter 11, your business can discharge debts and stop collections.But bankruptcy also comes with major downsides like liquidating assets, damaging your personal credit, and being unable to obtain financing in the future. So this nuclear option should only be exercised with experienced legal guidance.

Finding Help For Your MCA Breach of Contract Case

As this overview shows, MCA defaults kickstart an avalanche of legal consequences against business owners. Without fast help from attorneys, most small companies get buried in crippling judgements, bank levies, and collection harassment.Thankfully, there are qualified business lawyers that specialize in defending against MCA lenders and their abusive tactics. They understand the intricacies of these complex contracts and how to exploit flaws in their structure.If you face an impending MCA default or have already breached your agreement, then please seek legal help immediately. Look for lawyers experienced in commercial litigation, lender liability, and financial services disputes. Many provide free consultations and contingency fee structures to ease the burden.With the right guidance, you can get an emergency injunction to halt collections; negotiate a reasonable settlement; or defeat the contract in court. This will allow you to move forward with running (and rebuilding) your business.

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Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

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