How Do I Stop Paying An MCA?

Merchant cash advances (MCAs) provide quick financing to small businesses by purchasing a portion of future credit card sales. But the high costs and aggressive collection tactics have caused many business owners to later regret these loans and look for ways out. Unfortunately, MCAs do not have a clear path to terminate payments like other financing options.

MCA companies argue their purchases are not loans but investments, so normal lending rules and consumer protections often do not apply. And the signed contract typically includes daily repayment through automatic withdrawals with harsh penalties for stopping. So business owners face an uphill battle to exit an MCA.

Understanding MCA Repayment Terms

A core challenge with ending MCA payments is their structure does not match typical loans:

• No set repayment term or amortization schedule
• Repaid as percentage of daily credit card sales
• Typically no early repayment option
• Harsh default terms if payments stop

For example, an MCA may deduct 15% of credit card sales daily until they recover the full purchased amount plus a factor rate that can approach 100% or more. This open-ended structure aims to accelerate repayment, but also makes it difficult to stop payments since there is no clear end date.

Freezing the MCA Account

One option to halt payments is freezing the business bank account or credit card processor withdrawals. However, this will trigger default provisions of the MCA contract. Consequences typically include:

• The remaining balance becomes immediately due
• High default penalties and fees added
• Turned over to collections agency
• Potential for legal action or confession of judgement

The MCA company will be able to reverse any frozen withdrawals or force payment from another account. So while freezing accounts temporarily stops payments, it ultimately leads to greater repayment burdens due to harsh default terms.

Proving Unconscionability

Some businesses have sought legal judgements declaring MCA contracts void and unenforceable under unconscionability doctrines. This argues the terms are unfairly one-sided or abusive. Factors courts may consider include:

• Deception or misrepresentation by the MCA provider
• Terms so imbalanced they “shock the conscience”
• The merchant’s lack of sophistication or bargaining power
• Preying on vulnerable small business owners

However, unconscionability claims face an uphill legal battle given signed contracts. Outcomes rely heavily on state laws and judges’ discretion. Costly litigation also does not guarantee escaping repayment. So unconscionability is not a simple or assured path to ending MCA payments.

Declaring Bankruptcy

Filing for bankruptcy can halt collections and discharge qualifying business debts. Potential options include:

• Chapter 7 bankruptcy to liquidate and discharge obligations
• Chapter 11 bankruptcy to restructure finances
• Chapter 13 bankruptcy for sole proprietors

But MCA companies often fight discharging their agreements in bankruptcy court. They argue the cash was an outright purchase of future receivables, not a loan eligible for discharge. The legal distinction remains murky and depends on specific contract terms. Bankruptcy also has major consequences for business operations and personal credit. Overall it is an extreme step with uncertain outcomes for escaping MCA payments.

Selling the Business

Selling or closing down the business tied to the MCA can avoid further payments. But the provider still has a claim on future credit card sales they purchased. This can complicate finding a buyer who does not want to assume repayment obligations. Any business owner guarantees on the MCA may also still be enforceable after sale or dissolution.

Transferring the business to a spouse or heirs does not terminate contracts either. While selling provides a cleaner break than other options, it is still an extreme step with tax and livelihood implications beyond just the MCA.

Negotiating a Settlement

Some merchants have negotiated discounted buyouts or payment plans with MCA providers to settle obligations:

• Highlights unaffordable repayment burdens
• Threatens account freeze or bankruptcy
• Offers lump-sum payment to settle

This leverages the provider’s incentive to recover something rather than risk nonpayment through litigation or bankruptcy court battles. But success depends on the provider’s willingness to negotiate and access to funds to buy out the agreement.

Considering Advance Consequences

The limited exit options underscore why businesses should exercise caution before accepting an MCA. Important considerations include:

• Review contract terms and obligations thoroughly
• Understand the high costs and repayment structure
• Explore alternative financing options first
• Avoid “stacking” multiple advances
• Have an attorney review any agreement

While MCAs provide quick access to capital, the long-term consequences are often not fully recognized until exiting becomes difficult. Avoiding these financing offers from the start provides the cleanest outcome.

How Do I Stop Paying An MCA?

Merchant cash advances allow businesses to get fast, flexible working capital based on future credit card sales. But high repayment costs through daily debits can become unmanageable. Can you simply stop making payments on an MCA if it becomes too much? Legally, no. You remain responsible for repaying the full amount advanced even if you stop payments. But some strategic options may help.

Review the MCA Agreement

The first step is thoroughly reviewing your original MCA contract. Understand all the terms agreed to. Be clear on:

• The total dollar amount received upfront
• The holdback amount not funded initially
• The fixed repayment amount or percentage taken daily
• The total estimated payback amount
• Events that trigger a default, like stopping payments

Knowing your legal responsibilities under the agreement is crucial.

Attempt Negotiation

Approach your MCA provider to discuss difficulty meeting the repayment schedule. Many may be willing to negotiate new terms, like:

• Lowering the daily repayment percentage
• Extending the repayment period
• Agreeing to a fixed monthly repayment amount
• Allowing a few weeks of lower or no payments

Reasonable lenders want to avoid defaults, so keep communication open on hardships before unilaterally stopping payments.

Explore Refinancing

If negotiation fails, look into refinancing the MCA balance into a more affordable loan with lower rates. This pays off the MCA provider and establishes new repayment terms.

But refinancing an MCA is quite difficult and requires finding a lender willing to take over an unsecured, high-risk obligation.

Weighing Stopping Payments

While the desire for relief is understandable, unilaterally stopping MCA payments has major consequences including:

• Immediate default and full balance due
• Removal of future card processing capabilities
• Damage to your business credit profile
• Collection actions and lawsuits against your company
• Potential hits to your personal credit if guaranteed

Make sure the problems with nonpayment don’t outweigh trying to work with the provider.

Freezing Accounts

You could change bank accounts or freeze the linked card processing account to temporarily stop MCA payments. But merchants are contractually obligated to provide continual access.

Interrupting access triggers defaults. Providers can sue for breach of contract.

Filing Bankruptcy

As a last resort, a business can stop making MCA payments by filing Chapter 7 bankruptcy. This legally discharges unsecured debts.

But bankruptcy severely damages credit and is public record. Consult an attorney before considering this option.

Personal Guarantee Risks

With an MCA default, you remain personally responsible if you signed as a personal guarantor. Your business and personal assets can be pursued.

A corporate structure does not shield owners from personal liability if they provide guarantees.

Dealing With MCA Debt Collectors

If your stopped MCA payments prompt debt collection calls, know your rights:

• Collectors must provide written validation of the debt if requested
• Any negotiation offer must be in writing before paying
• Threatening legal action without actual intent is prohibited
• Harassing contacts at odd hours or work are unlawful

Keep detailed records of all collector contacts and report any violations.

Long-Term Consequences

Also consider that defaulting on an MCA can make future small business financing much harder to secure as providers view you as high risk.

MCA defaults remain on your business credit file for years. Be sure you can live with damaged credibility and limited options going forward.

Key Takeaway

There are few practical options for legally stopping payments on a merchant cash advance. Owners seeking relief should first communicate openly with providers, document hardships, and request modified repayment terms.

While nonpayment provides temporary relief, the long-term consequences make it an unwise path.