What Happens When a Business With a Merchant Cash Advance Closes Down?

A merchant cash advance (MCA) can provide quick capital to struggling businesses. However, MCAs also come with risks if the business later closes down. This article explores what happens when a business shutters after taking an MCA and how owners can navigate the fallout.

How Merchant Cash Advances Work

With an MCA, a lender provides a lump sum upfront to a business in exchange for a percentage of future credit card sales. Key aspects include:

• MCAs are not loans – the lender purchases future receivables.
• Payments deduct automatically from credit card sales daily or weekly.
• There is no set repayment term – payments continue until the MCA is repaid.
• MCAs are quicker to obtain than small business loans.
• Approval is based on credit card sales volume, not credit scores.

While easy to obtain, MCAs can be very expensive, with equivalent interest rates often exceeding 50% APR. This makes them high risk if the business later struggles.

What Happens When a Business With an MCA Shuts Down

If a business with an outstanding MCA closes, the MCA provider will likely continue attempting collections through various means:

• Taking payments from any existing business bank accounts.
• Attempting to garnish the business owner’s personal bank accounts.
• Filing a lawsuit against the business and/or owner for breach of contract.
• Sending the remaining MCA balance to collections.
• Damaging the business/owner’s credit if debts go unpaid.

The MCA agreement is technically still active, so providers can pursue various legal actions to recoup their investment from owners directly.

The Legal Implications and Owner Liabilities

Legally, when a business shuts down with an outstanding MCA, the business owner remains personally responsible for repaying the full remaining advance. Potential legal implications include:

• Breach of contract lawsuits and judgments against owners.
• Wage and bank account garnishments to collect on judgments.
• Seizures of personal property or assets.
• Tax liens being placed on owner’s assets.
• Civil and criminal penalties for fraud if misrepresentations were made.

Business owners should consult attorneys to understand their liability and defense options. But MCA providers have several avenues to pursue collection from owners directly.

Defenses Business Owners Can Attempt

There are some potential defenses business owners can raise against MCA collections, including:

• Improper MCA disclosures or violations of state laws.
• Unconscionable or predatory MCA terms.
• Errors or miscalculations in MCA payments collected.
• Illegal overpayments collected exceeding state usury caps.
• Failure to properly verify business financial data prior to funding.

While challenging, proving any unlawful or improper MCA practices may invalidate or reduce owner liability. Experienced legal help maximizes these chances.

Steps for Business Owners to Take

Proactive steps business owners facing closure with an MCA should take include:

1. Consulting attorneys to understand liability and prepare defenses.
2. Closing business bank accounts so they cannot be tapped.
3. Notifying the MCA provider of the closure in writing.
4. Attempting good faith negotiations for reduced settlements.
5. Not ignoring any lawsuits and responding properly.
6. Making the best possible settlement offer within means.

While daunting, taking appropriate legal and financial steps can help owners minimize fallout from an MCA with a shuttered business.

How Owners Can Attempt to Negotiate MCA Settlements

Some tips for business owners trying to negotiate MCA debt reductions include:

• Gather evidence showing inability to repay and financial hardship.
• Be proactive and engage providers early before legal actions.
• Offer reasonable lump-sum settlements backed by proof of means.
• Get all negotiated terms and releases in writing before paying.
• Leverage potential legal defenses to strengthen negotiation position.
• Appeal to providers’ incentives to avoid costly litigation.

While not guaranteed, fair and well-timed settlement offers can potentially resolve MCA debts for less than full balances due in some cases.

How Business Owners Can Attempt Self-Negotiation

Business owners may try negotiating MCA settlements directly by:

• Researching state laws and caps applicable to MCAs.
• Calculating exact amounts collected and owed to date.
• Documenting inability to repay and intent to close business.
• Sending formal settlement offer letters to providers.
• Following up persistently by phone to speak with decision-makers.
• Making reasonable, take-it-or-leave-it lump-sum offers.
• Refusing to pay any unauthorized bank account withdrawals.

Self-negotiation is difficult but may be successful with preparation and persistence.

How Business Owners Can Prioritize MCA Debts

With multiple MCAs, owners should prioritize addressing debts as follows:

1. MCAs already in litigation or threatening imminent lawsuits.
2. MCAs with judgments or ability to garnish accounts.
3. The highest balance MCA debts first.
4. The most aggressive MCA collectors.
5. Any MCAs with unlawful terms or practices.
6. The newest MCAs obtained most recently.

Settling riskiest and largest MCA debts first is advisable in closure situations with multiple advances.

Common Mistakes Business Owners Make

Some common mistakes business owners make when closing with an MCA include:

• Hoping debts will disappear or go away on their own.
• Ignoring legal notices and lawsuits from MCA providers.
• Not keeping thorough records of payments collected.
• Trying to hide assets or income from MCA providers.
• Failing to consult attorneys to understand rights and liability.
• Refusing to negotiate at all due to anger or principle.

Business owners should take responsible steps to address MCA debts properly despite the difficulties.

When to Consider Bankruptcy

For overwhelming MCA debts, business owners may consider bankruptcy options such as:

• Chapter 7 Bankruptcy – Liquidates assets to pay creditors, discharging remaining eligible debts.
• Chapter 11 Bankruptcy – Allows reorganization and negotiated debt repayment plans under court supervision.
• Chapter 13 Bankruptcy – Similarly establishes supervised debt repayment plan but for individuals.

While damaging to credit, bankruptcy may be a last resort if MCA debts become unmanageable.

Key Takeaways

Key points for business owners facing closure with an outstanding MCA include:

• Owners remain personally responsible for paying the full MCA balance.
• MCA providers can pursue collections through lawsuits and garnishments.
• Consult attorneys promptly to understand and prepare defenses.
• Attempt good faith negotiations for reduced settlements if possible.
• Do not ignore legal notices – be proactive and organized.
• Weigh bankruptcy as an option if MCA debts become overwhelming.

While a difficult situation, smart navigating of legal and financial options can help business owners mitigate MCA fallout from closures as best as possible.

Useful Resources

Some useful resources on merchant cash advances and business closures include:

• FTC Guide to Merchant Cash Advances
• SBA Guide to Closing a Small Business
• Article on Predatory Merchant Cash Advances
• Article on Merchant Cash Advance Nightmares

Consulting these and other resources can help business owners make informed decisions when winding down operations with an outstanding MCA balance.