MERCHANT CASH ADVANCE DEFAULT RATES: WHAT THEY MEAN FOR YOU

This is a HUGE topic. Many people wonder if they take an MCA, what are the chances they’ll default – by taking the money, are they setting themselves up for failure?

For many businesses, a Merchant Cash Advance (MCA) can feel like a lifeline when they need it the most. But what happens if you start missing MCA payments? Or if you simply can’t keep up with your MCA? That’s where MCA default rates come into focus—there’s a growing concern about how high they can be, and what that means for people like you, the business owner. No one wants to default, because now you’re getting sued.

DEFAULT RATES AT A GLANCE

Yes, MCA lenders often have flexible requirements, which can result in a higher-than-average default rate compared to traditional bank loans. MCA lenders don’t look at your personal credit score as much as your business revenue. As a result, many borrowers are approved, who don’t deserve the funds – or wouldn’t qualify normally. In fact, many small businesses rely on data from official agencies—such as the SBA.gov and the Consumer Financial Protection Bureau—to find the average failure rates among similar financing arrangements.

Here’s the bottom line:

• MCA default rates can exceed 10-20% in some sectors. More high risk businesses, like trucking and construction have high default rates. The MCA industry also gives money to low quality borrowers, which increases the default rate.
• They can skyrocket during economic downturns, especially in industries tied to fluctuating markets.
• They often carry short repayment terms, meaning if your cash flow goes down for even a short period, you might default. The lenders are required to lower their MCA, when your revenue goes down – by few actually do this.

PENALTIES AND LEGAL IMPLICATIONS

Penalties can be severe if you default on your MCA. They are unforgiving. Many MCA lenders often act unethically, when trying to recover their money.  Regardless of your situation, once you default, MCA lenders can take aggressive actions to get their money. Some possible consequences:

• Confession of Judgment (COJ): Certain agreements contain COJ clauses that allow the lender to get a judgment against you quickly. This doesn’t require them to go through the normal court process.
• Court Orders: MCA lenders might also seek judgments that freeze your accounts and seize your assets overnight.
• Skyrocketing Fees: Defaulting on an MCA can trigger higher interest rates, late fees, and a cascade of other penalties. If you try to get money in the future, it’ll be impossible since you’re blacklisted.
• Personal Guarantees: If you signed one, your personal property could be on the line. Many MCA lenders will add a personal guarantee, even though it’s not legal since this is an advance – not a loan.

The Federal Trade Commission (FTC.gov) has documented stories of unfair or deceptive tactics by some MCA lenders—ranging from hidden fees to misrepresentations about how defaults are handled.

Merchant Cash Advance default rates aren’t just a “borrower problem.”

• Lender’s Perspective: MCA lenders want to protect their investment; if you’re defaulting, they’re thinking about damage control. They might lean on a COJ or their legal team to ensure repayment. They won’t wait. They’ll move fast. They will assume you’re going to run, and keep the money, and not repay them.
• Business Owner’s Perspective: You probably used the MCA to keep your business afloat, or to seize a quick growth opportunity. Suddenly, the daily or weekly repayment structure becomes toxic, especially if sales dip. You have no way of making up the difference, and the lender is unwilling to lower what they take from you on a daily basis.

“Daily withdrawals can crush your cash flow.”

DEFENSE STRATEGIES: WHAT WE DO AT DELANCEY STREET

We’re DelanceyStreet.com, a top tier business debt relief company based in NYC, helping clients nationwide.

We understand how defaulting on an MCA can wreak havoc on your operations. Our approach is two-pronged: we handle negotiations with MCA lenders while giving you breathing room to focus on your day-to-day.

Key Defense Moves:

• Reviewing Your MCA Agreement: Checking for any sign of unfair clauses or ambiguous terms.
• Communication is Everything: Proactively contacting lenders, explaining your circumstances, and proposing a payment plan or settlement. Showing them the P/L and other docs, so we can help you get a good outcome.
• Legal Action When Needed: Our team, including our sister-law firm, can push back if the lender tries to strong-arm you with lawsuits or unfair COJ usage. We represent you in court.
• Restructuring or Consolidation: We sometimes recommend solutions like debt consolidation loans or invoice factoring.