What Happens If I Default On A Merchant Cash Advance


What Happens If I Default On A Merchant Cash Advance?

Taking out a merchant cash advance can be a great way for small businesses to get quick access to working capital. Unlike traditional bank loans, merchant cash advances don’t require a high credit score or collateral. The funds are advanced based on a percentage of your future credit card and debit card sales. It’s a relatively easy way for businesses to get the cash they need to grow.

But what happens if you end up defaulting on a merchant cash advance? Let’s take a look at some of the potential consequences:

Higher Repayment Amount

With a merchant cash advance, you agree to repay the advance plus a fee by allowing the lender to take a percentage of your daily credit card sales. If you default, the lender will typically charge a higher percentage of your sales until the remaining balance is paid off. This means you’ll end up paying much more in fees than originally agreed.

Personal Guarantee

Many merchant cash advance agreements require a personal guarantee from the business owner. This means if the business defaults, the owner is personally responsible for repaying the remaining balance. The lender can pursue legal action against the owner to recoup the funds.

Damaged Credit

Defaulting on any kind of financing can hurt your business and personal credit scores. Many merchant cash advance lenders report repayment activity to the business credit bureaus. A default will damage your business credit rating, making it harder to get approved for financing in the future.

Lawsuits and Collections

When you enter into a merchant cash advance agreement, you are entering into a legally binding contract. If you break that contract by defaulting, the lender can pursue legal action against you to recoup their losses. Many lenders will sell defaulted merchant cash advances to collection agencies, who can also take legal action against the borrower.

Bank Account Levies

As part of the merchant cash advance agreement, you likely authorized the lender to debit funds directly from your bank account for the daily repayment amount. If you default, the lender can continue levying your bank account until the remaining balance is paid. They may also freeze your accounts to prevent you from spending the funds.

Termination of Processor Agreement

To collect repayments, merchant cash advance lenders need access to process your credit card transactions. If you default, the lender may report your business to your merchant processor and request that your processing privileges be terminated. This would prevent you from being able to continue accepting credit card payments.

Seizure of Collateral

If you pledged any business assets or inventory as collateral for the merchant cash advance, defaulting means the lender can seize those assets. They may obtain a court order to enter your premises and take physical possession of the collateral to recover their losses from the default.

Business Shut Down

In a worst-case scenario, defaulting on a merchant cash advance could force you to shut down your business entirely. Without access to a merchant processor, bank account, or inventory, it can become impossible to continue operations. The lender may also obtain a court order to force your business to cease operations.


Some businesses are forced to file for bankruptcy as a result of defaulting on their merchant cash advance. While bankruptcy can eliminate other types of business debt, merchant cash advances are treated as commercial loans. This means the obligation may still have to be repaid in full, even after filing for bankruptcy protection.

Tax Implications

The IRS treats forgiven debt as taxable income. If any portion of the merchant cash advance balance is forgiven after default, you may owe income taxes on the forgiven amount. Always consult a tax professional to understand any potential tax consequences.

As you can see, defaulting on a merchant cash advance can spiral out of control quickly, leading to significant financial and legal consequences. If you anticipate having trouble making the daily repayments, it’s imperative to contact your lender right away to discuss alternative repayment options before you default.

What to Do Before Defaulting

Don’t wait until after you default to start negotiating with your lender. As soon as you realize you may have trouble meeting the repayment terms, take proactive steps to avoid default:

  • Contact your lender – Explain your situation and request an adjustment to the repayment terms or a temporary reduction in the daily repayment amount. Most lenders will work with borrowers to avoid a default.
  • Seek payment relief – Ask your lender about any hardship programs or payment relief options available. For example, they may be able to defer payments for a short period.
  • Ask about settlements – Some lenders may agree to settle for a lump sum payment that is less than the full remaining balance, avoiding a default.
  • Prioritize repayments – Treat your merchant cash advance payment as a top priority bill to pay each day before taking earnings from the business.
  • Cut expenses – Reduce operating expenses to free up more cash flow for making daily repayments.
  • Refinance – Consider refinancing with another provider to lower your daily repayment amount and avoid default.

If you do end up defaulting, don’t panic. Continue communicating with your lender to see if the situation can be resolved. For example, they may allow you to reinstate the agreement if you can pay the missed payments within 60-90 days. Be proactive and you may be able to get back on track and avoid the worst consequences.

At the end of the day, a merchant cash advance is still a financial obligation that must be repaid. Defaulting will only make the situation much worse. With open communication and prompt action, many defaults can be avoided completely. Don’t be afraid to ask your lender for help – it’s in their best interest to work with you to prevent a default whenever possible.

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