Are you at risk of defaulting on your merchant cash advance loan and consequently, breaching the contract? You should read this article from us, about what happens if you default, and ways to avoid defaulting and breaching the contract.
In this article we’ll talk about the topics below.

  • What happens if I default on a merchant cash advance
  • Defaulting on a merchant cash advance loan ramifications
  • How to avoid defaulting on a merchant cash advance loan
  • What happens if you breach a merchant cash advance contract
  • Can I get an 2nd position MCA to repay the first position


What happens if I default on a merchant cash advance
If you’re in danger of defaulting on a merchant cash advance agreement – we highly recommend you look at the contract and talk to a legal professional if possible. Consequences for defaulting on an MCA will vary from loan to loan. It also depends on how much money you have outstanding, and your business / personal situation. MCA’s aren’t considered loan, they are considered purchase agreements between a seller and buyer, for a portion of the future revenue to the buyer. MCA’s are NOT subject to usury laws, or other laws, that apply to traditional business loans.

An MCA is a contract, and there are consequences to breaking the contract. In some cases, an MCA company might sue for breach of contract. Defaulting doesn’t necessarily you mean broke the contract. For example, if you close your business – and default, that’s not a breach of contract. The MCA company would NO recourse at all. If you’re having issues repaying the loan, you might need to call the MCA company and setup a repayment plan. Alternative, depending on the age/size of your debt, you might be able to refinance the debt with a loan that offers lower interest/smaller periodic payments.

Defaulting on a merchant cash advance loan ramifications
In 2008, many business owners has no capital due to the economic crisis. It crippled the entire country. One of the most popular ways to get capital is to take a loan. Unlike traditional loans, MCA’s aren’t loans – they are a cash advances – where a lender is purchasing your future receivables. An MCA can be defaulted on because of a seasonal slowdown, or because you can’t afford to remain in business. Sometimes, businesses close the business because it’s not working out.
If you default due to closure of business, then the merchant cash advance has no real means of collecting on you. In rare cases, a merchant cash advance company might ask you for a personal guarantee. IF you default on a merchant cash advance loan and have signed a personal guarantee then the merchant cash advance company can come after your personal assets. If you don’t have a personal guarantee, then you’re in the clear.

The merchant cash advance company bought future receivables, and unfortunately since there’s no cash flow – that ends the payments. They can’t report this to the credit reporting agencies since they aren’t a lender, and there is no collateral to pursue.

Below are examples where you can get in trouble if you default via one of the means below:

  • Switching bank accounts
  • Interfere with the MCA taking ACH payments
  • Change merchant processing companies
  • Take cash, or other forms of payments, to reduce deposits in your bank account.

If you default due to one of the reasons above, the MCA can accuse you of breaching contract, and could pursue litigation. If you think your business simply isn’t profitable, it makes more sense to wind it down and exit.
If you are at risk of defaulting because revenue is lower, and the MCA is taking too much – then it can be tricky.

  • You borrowed money
  • Business is slower now
  • The MCA cut is too high

In situations like that, you can chat with the MCA company and discuss a modification to your MCA agreement, or deferment. You should make sure you’ve analyzed your business and can create a debt schedule that will work. If you’ve made these attempts and still cannot pay it, then you have no choice but to stop the auto withdrawals. This is a breach of MCA contract, and will expose you legally.

Can I get a second position MCA 
Second position MCA’s are rare, but happen. You can get a second position MCA depending on your cash flow, but often if you’re at risk of defaulting on your position MCA – a second position MCA will not manifest. The second position MCA company will look at your financial situation, see the huge risk, and choose not to invest.

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