What Happens If You Default on a Merchant Cash Advance?

A merchant cash advance (MCA) offers businesses an upfront lump sum of capital in exchange for a percentage of future revenues, often from credit or debit card transactions. Unlike traditional loans, an MCA is a purchase of future receivables, not always subject to the same regulations. Repayment occurs through automated daily or weekly deductions from the business’s bank account or payment processor. Small businesses often seek this financing for quick working capital, especially those with consistent credit card sales, as it can be easier to obtain than traditional bank loans. While providing rapid funding, this structure carries risks if a business cannot meet repayment obligations.

Initial Consequences of Default

An MCA default often begins when automated clearing house (ACH) debits fail due to insufficient funds. The MCA provider will typically attempt to re-debit the account, and the business may incur returned transaction fees. Failed payments trigger escalating communications from the provider, including persistent calls, emails, and demand letters. These efforts quickly press for resolution and outline the outstanding balance, often moving faster than traditional loan default processes.

Most MCA agreements include an “acceleration clause.” This provision allows the provider, upon default, to demand the entire remaining balance immediately. This fundamentally alters repayment terms, making the full debt due at once. Even a single missed payment can trigger this demand, placing immediate financial pressure on a struggling business. The speed of these consequences leaves little time to react or strategize.

Legal Actions and Business Assets

If a business does not resolve the default, the MCA provider will likely initiate legal action for breach of contract. The goal is a court judgment, which legally confirms the debt and serves as a basis for collection.

Many MCA agreements include a “Confession of Judgment” (COJ) clause. If signed, this pre-authorizes the provider to obtain a judgment without trial or prior notice in some jurisdictions, significantly accelerating the legal process.

Once a judgment is secured, the provider gains enforcement mechanisms. A common one involves Uniform Commercial Code (UCC) filings. Providers often file UCC-1 financing statements at the advance’s inception, creating a security interest in business assets like accounts receivable, inventory, equipment, and future revenue. A UCC lien provides a claim on these assets, potentially allowing seizure or forced sale to satisfy the debt.

Some providers file a “blanket lien” covering all company assets. While a UCC-1 filing doesn’t automatically freeze bank accounts, it establishes a strong legal claim to the business’s property.

Beyond UCC liens, a judgment allows the provider to pursue bank levies or garnishments. A bank levy freezes and seizes funds directly from business bank accounts, disrupting operations. To execute a levy, the creditor obtains a writ of execution from the court.

Most MCA agreements require a personal guarantee from the business owner. This means the owner assumes personal responsibility for the debt if the company defaults, making personal assets like bank accounts, real estate, and investments vulnerable. This bypasses limited liability protection, making the owner individually liable.

If a personal guarantee is in place and a judgment is obtained against the owner, wage garnishment may also occur. The direct exposure of personal assets, whether the guarantee is unlimited or limited, represents a substantial risk of MCA default.

Impact on Credit and Future Financing

Defaulting on an MCA significantly impacts a business’s credit standing and future financing. While MCAs typically don’t report to business credit bureaus during regular repayment, default leading to legal actions or collections severely damages the business’s credit profile. Court judgments are often reported and remain on business credit reports for years, signaling a high-risk borrower.

UCC filings, common with MCAs, are public records visible to lenders. A UCC lien indicates an existing claim on assets, and a “blanket lien” covering all assets can deter new creditors.

For owners with a personal guarantee, repercussions extend to their individual credit. Defaulted MCA debt leading to collections or a personal judgment can substantially harm the owner’s personal credit score. Though major consumer credit bureaus may no longer display civil judgments on reports, they remain public records accessible to lenders and can influence personal loan or mortgage applications.

A history of MCA default, especially involving judgments, liens, or collections, makes obtaining future business financing challenging. Lenders view this as a red flag, often leading to denials for new loans or lines of credit. If funding is secured, it will likely be at higher interest rates and with more stringent terms, reflecting increased risk.

Exploring Resolution Options

When facing an MCA default, proactive engagement with the provider is a constructive first step. Communicating with the provider or their collections department as soon as difficulties arise can open resolution avenues. Providers may be receptive to negotiation, preferring a modified arrangement over legal action.

Businesses can explore options like requesting reconciliation, which adjusts daily payments if sales decline, providing immediate relief. Proposing a temporary reduction in daily holdback percentages or payment forbearance can also stabilize cash flow.

Another option is debt settlement, negotiating a reduced lump sum or installment payments to satisfy the debt. This can significantly reduce the amount owed, as providers may accept less to avoid litigation. Engaging legal professionals specializing in MCA debt is beneficial for effective settlement negotiations.

Beyond settlement, debt restructuring modifies repayment terms for sustainability. This might involve extending the repayment period to reduce daily payments, or consolidating multiple advances. Restructuring aims to create a viable payment plan, allowing the business to operate without constant cash flow strain.

Seeking professional advice from an attorney specializing in business debt or MCA default is highly advisable. These experts can review the MCA agreement, identify unfair terms, and guide the business on its rights and defenses. An attorney can negotiate with providers and protect the business from aggressive collection tactics.

As a final consideration when other attempts fail, bankruptcy offers a legal framework for overwhelming MCA debt. Chapter 7 bankruptcy, a liquidation process, can discharge personally guaranteed MCA debt for individual owners or facilitate business closure. For businesses continuing operations, Chapter 11 bankruptcy (especially Subchapter V for small businesses) allows debt reorganization under court protection. Chapter 13 bankruptcy provides a repayment plan for individuals, including sole proprietors, to manage personally guaranteed business debts. These options provide an automatic stay, halting collection efforts, and can offer a fresh financial start, depending on the MCA agreement and business structure.