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When the Cash Flow Stops: What Happens When a Merchant Cash Advance Business Closes Down

Running a small business is tough. Between managing employees, keeping customers happy, and trying to turn a profit, it can feel like you’re constantly on the verge of either burning out or going broke. So when that cash flow starts running dry, it’s tempting to turn to alternative financing like merchant cash advances to keep things afloat. But what happens when, despite your best efforts, the business just can’t cut it and you have to close up shop?

An Introduction to Merchant Cash Advances

Let’s start with a quick overview of how merchant cash advances (MCAs) work. An MCA isn’t a business loan – it’s the purchase of a portion of your future sales by the MCA company

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. So rather than getting a lump sum and paying it back with interest like a traditional loan, you get the money upfront and the MCA company takes a fixed percentage of your daily credit card or other sales over a period of 6-24 months until you’ve paid back the advance plus a fee


.This can be helpful for businesses struggling with cash flow since you only pay back what you earn, and there’s no set monthly payment schedule. However, MCAs are considered very high-risk financing with equivalent APRs usually over 100% 


. And if your business closes before fully repaying, things can get messy.

Why Do Small Businesses Fail?

Before we get into the nitty gritty of how closing affects outstanding MCAs, let’s look at why small businesses fail in the first place. According to the SBA, about 20% close in their first year and 50% by year five


. Some common reasons include



  • Poor location or marketing
  • Insufficient capital
  • Lack of experience/poor management
  • Unexpected growth or expenses
  • Personal use of business funds
  • Poor credit management

Of course, unforeseen events like recessions, supply chain issues, or even something like COVID-19 can also force otherwise successful businesses to close up shop.Regardless of the reason, closing down is often a last resort. Many businesses will turn to MCAs and other alternative financing first, hoping the cash infusion can save the sinking ship. But this “solution” can sometimes just delay the inevitable – and leave you with even more debt when it comes time to close.

Outstanding Debts When Closing a Business

Shutting down a business doesn’t make your financial obligations disappear. As a business owner, you’ll likely have some combination of the following debts to deal with:

What happens with each of these varies. Traditional lenders like banks usually require fixed monthly payments, so you’d need to pay off the remaining balance or work out a settlement. Vendors might be willing to negotiate if you can pay a portion of the outstanding invoices


.But MCAs operate a bit differently…

The Merchant Cash Advance Problem

With a merchant cash advance, the MCA company purchases a portion of your future receivables. So in theory, if you close up shop and have no more incoming cash flow, there should be nothing left for them to collect. Right?Well, not so fast. Turns out most MCA companies anticipate business closures, and structure their agreements accordingly. Some potential pitfalls include



  • Personal guarantee – If you personally guaranteed the MCA, you can still be held liable even if the business shuts down.
  • Confessions of judgement – These waive your right to defend against collection, allowing the MCA to seize your assets.
  • Going after old revenue – Some MCAs will try to garnish old revenue sources like bank accounts.
  • Deceptive collections – Harassment, threats, or even violence from shady collectors.

So while you might think closing your doors means the MCA goes unpaid, they unfortunately have tricks up their sleeve to get their pound of flesh.

The Aftermath: Lawsuits, Judgments, and Liens

What happens when you close up shop with outstanding MCA debt really depends on the specific company and agreement. But it often plays out something like this:

  1. You close your business and stop paying the MCA.
  2. The MCA company sues you for the balance, using the confession of judgement.
  3. The court enters a judgement against you personally for possibly hundreds of thousands.
  4. The MCA company puts liens on your assets and garnishes accounts.
  5. Your credit and finances take a major hit.

And this is if you’re lucky enough to avoid extrajudicial harassment and intimidation tactics


. Not exactly a smooth exit!

Is There Any Recourse?

If you find yourself facing the wrath of an MCA company, don’t just accept it as inevitable. Here are a few options that may help:

  • Negotiate a settlement – Offer to pay a portion of the balance and get the rest waived.
  • File for bankruptcy – This can eliminate some debts, including MCAs in some cases.
  • Challenge the agreement – Look for prohibited terms or deceptive practices.
  • Report abuse – If collectors cross the line, file complaints with the CFPB or state regulators.
  • Get legal help – Consult with an attorney experienced in MCA cases.

The laws around MCAs are still developing, so you may have more leverage than you think. Don’t let them bully you into paying debts that aren’t rightfully owed.

How to Avoid MCA Problems When Closing Your Business

Hindsight is 20/20, but if you’re contemplating closing up shop, here are some tips to mitigate potential issues with MCAs:

  • Carefully review agreements and don’t sign anything you don’t understand.
  • Avoid personal guarantees whenever possible.
  • Don’t sign confessions of judgement.
  • Keep detailed records of all communications and transactions.
  • Consult a lawyer before closing if you have outstanding MCAs.
  • Be upfront with the MCA company about your situation.
  • Only agree to reasonable settlements you can actually pay.
  • Make sure any settlement agreement is in writing.

And if you’re seeking financing but want to avoid MCA headaches down the road, look into alternatives like business credit cards, investors, or traditional bank loans. While not always easy to get, they generally offer more protections if you need to close down.

Closing Your Doors Doesn’t Mean Closing the Book

Closing a small business is difficult enough without having to worry about problems with outstanding merchant cash advances. But being aware of the potential pitfalls, knowing your rights, and planning ahead can help you wrap things up as smoothly as possible.With some forethought and legal guidance, you can hopefully avoid any nasty surprises and move on to your next venture unencumbered. Just be sure to apply the lessons you’ve learned if you ever need financing again. Because while merchant cash advances can seem appealing when cash gets tight, they often create more problems than they solve.

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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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