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What Happens if I Default on a Merchant Cash Advance?

If you’ve taken out a merchant cash advance (MCA) to get quick funding for your business, it’s important to understand the consequences of defaulting on this type of financing. Unlike a traditional bank loan, defaulting on an MCA can have swift and severe repercussions. Here’s what you need to know.

How Merchant Cash Advances Work

A merchant cash advance provides businesses with a lump sum of cash upfront in exchange for a portion of their future credit card sales or receivables. The MCA provider collects their portion, plus fees, directly from the business’s merchant account or bank account on a daily or weekly basis.While MCAs can provide fast access to capital without many of the requirements of a bank loan, they typically come with very high costs – sometimes equating to annual percentage rates (APRs) in the triple digits. This makes them very risky for businesses.

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What Constitutes Default on an MCA?

The specific conditions that trigger a default can vary based on the agreement you signed with the MCA provider. However, common events of default include:

  • Failing to make required payments
  • Breaching representations or covenants in the agreement
  • The death of the guarantor
  • Bankruptcy or insolvency of the business
  • A significant decline in receivables or average monthly revenue
  • Closing the business

Carefully review your contract to understand exactly what could put you into default. Even a short-term dip in sales or cash flow issues could allow the MCA company to take action.

The Consequences of Defaulting

When you default on a merchant cash advance, the funder has broad powers to collect under the agreement. MCA contracts often have a “confession of judgment” clause that allows the funder to unilaterally enter a judgment against you if you default.This means they can immediately:

  • Freeze your bank accounts and merchant accounts
  • Seize your receivables and assets
  • Pursue aggressive collection actions

Unlike defaulting on other types of business financing, there is no lengthy court process required. The funder can move very quickly to disrupt your business operations and get their money back.Some of the most common consequences of defaulting on an MCA include:

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1. Legal action

The MCA provider will likely sue you to collect the outstanding balance, plus interest and fees. They may go after your personal assets as well if you signed a personal guarantee.

2. Damaged credit

The default will be reported to business credit bureaus, severely damaging your credit rating and making it harder to obtain financing in the future.

3. Difficulty processing credit card payments

The MCA company may be able to intercept or re-route your credit card receivables until the debt is repaid. This can make it very difficult to keep your business running.

4. Constant phone calls and emails

Expect aggressive outreach from the MCA provider and potentially from third-party debt collectors if they sell your debt.

5. Liens on your assets

The funder can place liens on your business assets, making it impossible for you to sell property or equipment without paying them first. They may even be able to seize and liquidate assets.

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6. Frozen bank accounts

Your business bank accounts may be frozen or levied, cutting off access to operating capital and crippling your ability to pay employees and vendors.

7. Bankruptcy

If you can’t reach a settlement or pay what you owe, you may be forced to file for bankruptcy protection. However, even in bankruptcy, many MCA debts will not be discharged.

What To Do if You Can’t Pay

If you’re struggling to make payments on a merchant cash advance, the most important thing is to be proactive. Don’t wait until you’re already in default to reach out to the funder.Contact them as soon as possible to explain your situation. They may be willing to work out a payment plan or modify the terms of your agreement. Document all of your communications in writing.You can also try to get financing from another source to pay off the MCA, such as a term loan from a bank or online lender. However, this may be difficult if your credit is already damaged. You’ll likely need to pledge collateral.If you’re being sued by the funder, don’t ignore it. Respond to the lawsuit and show up to all court dates. Consider hiring an attorney who specializes in business debt and MCA litigation to represent you. They may be able to help you negotiate a settlement or defend against the lawsuit.

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Preventing MCA Default

Of course, the best way to handle MCA default is to avoid it in the first place. Before taking out a merchant cash advance:

  • Carefully assess whether your business can afford the daily or weekly payment schedule
  • Have a plan for how you will use the funds to generate revenue and ROI
  • Read the agreement thoroughly and make sure you understand the default provisions
  • Avoid stacking multiple MCAs on top of each other
  • Regularly monitor your cash flow and receivables

If you’re unsure whether an MCA is right for your business, consider reaching out to a financial advisor or discussing alternatives with an accountant or lawyer. Taking on high-cost debt always carries significant risks.

The Bottom Line

Defaulting on a merchant cash advance can have devastating consequences for your business. The funder can quickly drain your accounts, disrupt operations, and pursue legal action against company and personal assets.If you’re struggling to keep up with MCA payments, the sooner you address the situation, the better. Communicate with the funder and seek legal counsel if needed. Most importantly, think carefully before taking on this type of financing. Make sure your business can truly handle the cost.For more information on merchant cash advances and business financing, check out these resources:

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