What happens when you stop paying an MCA

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 you moved money out of 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 is 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. The agreements are setup so that it is VERY easy for you to be considered a default, and for punitive, and automatic, fees to kick in.

What that breach unlocks is acceleration – most people don’t know this clause is in their agreement. The 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 your new bank account is already empty

So, now  you’re in a situation – money is choked off, your revenue is dropping because it’s getting redirected – and you do the obvious thing and open an account at a different bank. Opening at a different bank is where people lose a week they didn’t have. 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 they have permanent access, 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. Unless you switch banks, it doesn’t change anything. They still have access to your new accounts opened at the same bank.

The debits keep coming too. Your old ACH authorization gets re-presented under a different originator ID, sometimes three or four attempts in a single day, off rotating company names you won’t recognize on the statement. Lenders do this, in case you blocked their individual ACH authorization – because lenders will assume you blocked them, their name, but still can try from other names.

Many people don’t realize switching the account is itself a default in their contract. The block-and-switch clause is in there, and to a funder it doesn’t read as hardship, it reads as fraud, which changes how fast and how mean the file moves – often this means acceleration.

The processor switch some business owners do buys more than the bank switch – weeks instead of hours – because routing your card receipts to a lockbox the UCC-1 doesn’t name actually breaks the pipe for a stretch. The deposits go quiet. You feel like it worked. What you bought is a few weeks, because the same 9-406 notice that redirects a bank deposit redirects a processor too once they identify the new one, and meanwhile changing the processor of record tripped another event of default that lets them accelerate the whole RTR if they hadn’t already. So the breathing room comes attached to the contractual hook for the entire balance. People do it anyway. Sometimes it’s the right move. It is not a clean one. Often the lenders will do fake transactions on your payment processor if you have an e-commerce website in order to see whose processing the payment.

Can they come after me personally?

Yes. And it survives almost everything else you try. Nearly every MCA agreement you signed carried a personal guarantee. The PG means the obligation isn’t the LLC’s, it’s yours – 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 there. Moving the business banking, dissolving the entity, none of it touches the person who signed. The funder collects from you regardless of what the company does or where it banks. If you open your contract now, or contracts(if you have multiple MCA’s stacked), you will see that virtually all 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 many lenders have setup shop in other states, in order to setup a COJ there. Other states are more favorable.

Where the leverage is on a merchant cash advance

The thing that actually moves a funder is the argument that the contract was never a 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

The practical version of the argument is the reconciliation request. Your contract almost certainly says 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. Send it in writing, dated, citing the clause. It must be sent several times, if needed. Most funders ignore it or bury you in document demands until it never functionally happens. They’ll ask for many onerous document requests in order to stall you, so you forget, or so you default before that. That refusal is the useful part – a reconciliation provision that exists on paper but never works in practice is one of the things courts have pointed to in calling the whole agreement a loan.