Welcome to Delancey Street. Our objective in this blog post is to educate you about what happens when you default on a merchant cash advance. This is a question that keeps many business owners awake at night. But it doesn’t have to.
Short answer: When you default on an MCA, the funder can immediately ask for the full repayment of the entire balance. They can hit your bank account with NSF fees, reversal fees, file UCC lien notices to get your receivables, and sue you and whoever personally guaranteed your MCA. In some cases, they can a restraining order which freezes your personal and business bank accounts within hours. Many people think they might get a 30 day grace period, this is false. There’s no 30 day grace period, there’s no federal consumer protection laws to slow down the lenders. MCA’s are commercial transactions, and this is reflected by the fact you don’t have the safeguards you normally would have if this was a consumer loan. If you’re behind on payments, or considering defaulting, read this carefully before you do anything at all.
What counts as a default on an MCA?
Most mca agreements define default, more broadly, than a traditional loan. You are not in just in default when you stop paying. Under a typical MCA agreement you are in default the moment you do anything of the following:
- Block, reverse, or change, the daily ACH without the lender’s consent
- Close your bank account, and open a new bank account, and move deposits there
- Switch payment processors without telling the lender
- Take on additional financing(this is the stacking clause in virtually every MCA agreement). Taking a second MCA is an example of an default.
- You sell the business, transfer assets, or change ownership
- Make any misrepresentations in the original application you submitted to the MCA lender, including fake bank statements, misstating revenue
- File for bankruptcy
The consequences of a default can vary, from lender to lender. As a business owner you’re probably well aware – you didn’t take financing from a traditional lender. Some of the MCA lenders are unsavory characters. If they even smell a default, they’ll accelerate the full balance, and force an outcome that is on their terms.
What happens in the first 72 hours after your default
The MCA enforcement timeline is extremely fast. Here’s what happens in the order it usually occurs.
- The ACH gets redone. Then redone again. Most funders will try to redo the daily debit two or three times after the first NSF. Each will trigger an NSF fee from your bank, and a returned payment fee from the lender. A single missed week can add over $500 in fees alone.
- Many lenders have an in-house collections team, who will start calling you. They are very aggressive, and this is by design. You should expect calls on your busines line, your cell phone, the personal guarantor will also get calls, all within a few days. Some lenders will even begin contacting customers, and vendors, who are on your bank statements. They have full rights to do that. Some lenders will begin threatening you aggressively, in ways that feel illegal.
- The balance is likely to get accelerated. The purchased amount, (what you owe), becomes due immediately in full. You no longer owe just the daily payment. You owe the entire remaining balance, default fees, attorney fees, and more.
- When you took that MCA, the lender filed a UCC-1 financing statement against your receivables/business. At time of default, they will send notices to your CC processor, customers, and anyone else who pays you. They’ll instruct these people to redirect payments to the funder. This is to lock you down, and intercept the money. Done correctly, business owners will see their cash flow choked off instantly within a day.
The big question: will you get sued?
The majority of MCA agreements choose a New York choice of law, and choice of forum. This is not an accident. NY commits commercial interest rates that are usurious, and many lenders are based out of New York. Until 2019, NY allowed Confession of Judgement against out of state defendants. Even after 2019 reforms, NY State remains the dominant jurisdiction. If you’ve defaulted on an MCA, you should expect a lawsuit filed in either Erie County, Kings County, or NY County Supreme Court. The complaint will name your business, every personal guarantor, and any affiliated entity. The cause of action will usually be a breach of contract. The summons can be served on a registered agent, or by substitute service. Many business owners don’t evne realize they’ve been sued until a default judgement has already been entered. Default judgements in NY state can be gotten in as little as 30 to 40 days.
Bank Account Freezes and Restraining Notices
This is the part most business owners don’t realize. Once the lender has a jdugement, they can issue a restraining notice to any bank where you, or a guarantor, have an account. The bank is required to freeze up to twice the judgement amount ASAP. Usually, they’ll just freeze the entire account until further notice. In essence, this means, a $150k judgement can freeze a bank account for $300,000. Your payroll will bounce, vendors will get stiffed, rent won’t clear, and more. Unfreezing the account requires either paying the judgement, or posting a bond and filing a motion to vacate – which can take weeks. Another alternative is negotiating a settlement with the creditor.
In addition, almost every MCA agreement has a personal guarantee. This is sometimes called a performance guarantee. The guarantee is usually limited to specific events, like misrepresentation, breach of the the no-stacking clause, voluntary bankruptcty filing, or interfering with the daily repayment of the MCA. The goal of the lender is to prove that one of these triggering events occurred. This changes the limited backstop to a full blown personal liability for the entire balance of the MCA. Once this occurs, your personal assets, like your home, your investment accounts, etc, are all on the table.
What About Stacking? Doesn’t Taking Another Advance Solve the Problem?
It does not. Taking a second, third, or fourth advance to cover the first is the single most common mistake merchants make, and it is what turns a manageable cash flow problem into a terminal one.
Each new advance adds another daily debit, another factor rate (typically 1.30–1.55), another personal guarantee, and another UCC filing that may or may not be subordinated to the first. The math compounds against you almost immediately. A business pulling in $80,000 a month in revenue cannot service three advances simultaneously debiting a combined $4,000–$6,000 per day. The “death spiral” is not a metaphor — it is the predictable arithmetic outcome of stacking.
Funders also share data. Once you stack, you are flagged in the broker network, and the only offers you will see are from the most predatory shops in the industry, charging the highest factor rates, with the most aggressive default provisions.
Your Real Options When You Default (Or Are About To)
There are only four legitimate paths forward once you cannot afford the daily payments. Anyone telling you otherwise is selling you another advance.
Reconciliation. Most MCA agreements contain a reconciliation clause that allows the merchant to request a temporary reduction in the daily debit if revenue drops. Funders are required by the contract to consider it in good faith. In practice, they rarely grant meaningful reconciliation without legal pressure — but invoking the clause in writing creates a record that helps in later litigation or settlement.
Negotiated settlement. Most MCA balances can be settled for 40–60 cents on the dollar, sometimes lower depending on the funder, the age of the default, the strength of the merchant’s defenses, and whether litigation has already started. Settlement typically involves a structured payoff over 6–18 months, a full release, and the termination of UCC filings. This is the path most merchants end up on, and it is what firms like ours negotiate every day.
Chapter 11 Subchapter V bankruptcy. For businesses with debts under the Subchapter V threshold (currently $7.5 million through the most recent extension), Sub V offers a streamlined reorganization that can discharge or restructure MCA debt over 3–5 years. It is faster and cheaper than traditional Chapter 11, and it stops all collection activity the moment you file. It is not the right answer for every merchant, but it is the right answer for more merchants than realize it.
Litigation defense. If the funder sues, there are real defenses available — usury reclassification (arguing the “advance” is actually a loan, which most courts will entertain if the reconciliation clause is illusory), breach of the implied covenant of good faith and fair dealing, fraud in the inducement, and improper venue, among others. None of these are silver bullets, but they create leverage for settlement.
What You Should Not Do
Do not switch bank accounts and try to hide the new one. Funders subpoena bank records and find new accounts within weeks. Doing this also converts the case from a contract dispute into a fraud allegation, which defeats most defenses and can pierce the personal guarantee.
Do not take another advance to cover the existing one.
Do not ignore a summons. Default judgments are the worst possible outcome because they eliminate every defense you would otherwise have.
Do not negotiate directly with the funder’s collections team without understanding what you are agreeing to. Most “settlement” offers from in-house collections include confessions of judgment, broad releases that protect the funder from usury claims, and acceleration clauses that make any future missed payment catastrophic.
Frequently Asked Questions
Can an MCA company really freeze my personal bank account? Yes, if they have a judgment and your personal guarantee was triggered. The restraining notice is issued under CPLR 5222 and applies to any account where you are a signer.
Will defaulting on an MCA hurt my personal credit? Directly, usually no — most MCA funders do not report to consumer credit bureaus. Indirectly, yes. Judgments are public record, UCC filings show up on commercial credit reports (PayNet, Experian Business, D&B), and lawsuits get picked up by data aggregators. Your ability to get any future business financing will be severely impaired.
How long do I have before they sue? It varies. Some funders file within 10 days of default. Others wait 60–90 days to let fees accumulate. The aggressive shops file fastest.
Can I just close the business and walk away? Not if you signed a personal guarantee, which you almost certainly did. The funder will pursue the guarantor regardless of what happens to the business entity.
Is bankruptcy really an option for a small business with one or two MCAs? Yes. Sub V was specifically designed for exactly this situation, and the threshold covers the overwhelming majority of MCA-burdened small businesses.
