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What Happens if I Default on a Merchant Cash Advance?

Taking out a merchant cash advance can provide much-needed working capital for a small business. However, failing to repay the advance as agreed can have serious consequences. In this article, we’ll break down what happens when you default on a merchant cash advance.

Overview of Merchant Cash Advances

A merchant cash advance (MCA) provides a lump sum of capital to a business in exchange for a percentage of future credit card sales. It is not technically a loan, so MCAs are not subject to the same regulations.Here are some key aspects of merchant cash advances:

  • Fast approval and funding – Businesses can get an MCA in days with minimal documentation
  • No fixed payments – You repay a fixed percentage of daily credit card sales until the full amount plus fees is repaid
  • Higher cost of capital – MCAs typically charge the equivalent of 60-200% APR interest
  • Daily repayments – A portion of each day’s credit card sales goes to the MCA provider via split payments

Because there are no fixed monthly payments, MCAs can work well when cash flow is irregular. However, the high cost of capital makes them a very expensive way to borrow money.

What Happens When You Default on an MCA

Defaulting on a merchant cash advance happens when you fall so far behind on payments that the provider deems the agreement to be in default. Unfortunately, defaulting on an MCA can ruin your business’s finances.

Collections Efforts

As soon as an MCA goes into default, the provider will turn over the account to professional debt collectors. The collections company will aggressively pursue payment through phone calls, letters, lawsuits, or other means.The Fair Debt Collection Practices Act has limits on what debt collectors can do, but their tactics can still be very disruptive to a small business. Getting calls from collectors all day will severely impact productivity.

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Liens Placed on the Business

Many MCA agreements allow the provider to place a lien on the business assets or bank accounts if payments stop. This gives them a secured legal claim ahead of other creditors.The provider can seize control of bank accounts or force the sale of assets like equipment to satisfy the lien. This can make it impossible to continue operating the business.

Personal Guarantees Come Into Play

Most MCAs require a personal guarantee from the business owner. This makes the owner personally responsible for the debt if the business defaults.The provider can come after the owner’s personal assets like their home, car, or investment accounts. Personal bankruptcy may be the only option if the guarantor cannot pay.

Merchant Processor Terminated

MCA providers can work with merchant processors to instantly cut off a business that defaults. Without a merchant processor, a business cannot accept credit cards from customers.Getting merchant services reinstated after an account closure for non-payment is extremely difficult. Most providers will not work with businesses that defaulted in the past.

Hurt Personal Credit Scores

Like other defaults, failing to repay a merchant cash advance damages your personal credit. The provider will report the default to credit bureaus.A default that large can drop credit scores by 100 points or more. Poor credit makes many aspects of life more difficult and expensive.

Legal Action

As a last resort, MCA providers can sue for breach of contract if you default. Besides seeking payment, they may ask the court for penalties, interest, and legal fees.Defending a lawsuit is expensive even if you win. Add in potential judgments against you, and it can be financially catastrophic.

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Strategies for Avoiding Default

Defaulting on a merchant cash advance can destroy a business. Here are some tips to keep your payments on track:

  • Carefully monitor cash flow – Make sure you have enough sales volume to service the fixed percentage owed each day
  • Ask for modifications if needed – Some providers may extend terms if you communicate proactively about cash flow issues
  • Prioritize MCA payments over other expenses – Payment percentages are fixed, so you have to adjust other costs
  • Explore refinancing options if possible – You may qualify for lower rates through alternative lenders
  • Get professional help early – Consult an attorney or financial advisor at the first sign of trouble

The bottom line is that you should only take a merchant cash advance if you are extremely confident you can afford the payments. Defaulting even once can permanently damage your business finances.

What to Do if You Default on an MCA

If you do end up defaulting, act quickly to mitigate the fallout:

  • Negotiate – Ask the provider for alternative payment arrangements or settlement offers
  • Get legal help – Consult an attorney experienced with MCA default cases
  • Consider bankruptcy – Filing for bankruptcy may pause collections and discharge part of the debt
  • Protect assets – Remove liens promptly and shelter personal assets however possible
  • Rebuild credit – Work on improving personal credit scores damaged by the default
  • Change banking – Open new business banking accounts to preserve access to capital

While the consequences of default are severe, some businesses can recover with time. The most important thing is to take action quickly after default to limit further damage.

Frequently Asked Questions

Here are answers to some common questions about merchant cash advance defaults:

Can I negotiate with the MCA provider?

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Yes, most providers are willing to discuss alternative payment plans or discounted payoff offers. They prefer to recoup something rather than force you out of business completely.

What happens if I just close my business after defaulting?

Shutting down your business does not erase responsibility for the debt. The provider can still come after your personal assets or earnings thanks to the personal guarantee.

How long do MCA defaults stay on my credit report?

Like other negative credit events, an MCA default can stay on your personal credit history for up to 7 years. This severely limits access to financing over that period.

Can I get another MCA after defaulting in the past?

It is possible but very difficult. Most providers will automatically reject applications with prior defaults. You may need to rebuild your business’s finances for years before qualifying again.

Is bankruptcy a good option for MCA default?

Bankruptcy stops collections activity and discharges part of the debt. However, it has serious long-term consequences for your personal credit and ability to access business financing in the future.

Key Takeaways

Defaulting on a merchant cash advance sets off a chain reaction that can permanently damage your finances:

  • Aggressive collections harassment disrupts business operations
  • Liens lead to seizure of assets and bank accounts
  • Personal guarantees put all your assets at risk
  • Merchant processing gets cut off, preventing credit card acceptance
  • Huge hits to personal credit scores make financing difficult
  • Potential lawsuits hammer the final nail into the coffin

Acting quickly to negotiate, protect assets, and rebuild credit are your only hopes of emerging intact. Better yet, only take an MCA if you are 100% confident you can afford the payments. Defaulting even once severely limits your financial options for years.

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