Defaulting on an MCA with a Personal Guarantee

Understanding Personal Guarantee Defaults and Merchant Cash Advances

Defaulting on a merchant cash advance (MCA) with a personal guarantee can have severe consequences for small business owners. Personal guarantees are common in MCA agreements and can place the business owner’s personal assets at risk, in addition to the assets of the business. When a small business owner defaults on an MCA with a personal guarantee, several legal and financial actions may occur. This article will explore what it means to default on an MCA with a personal guarantee, how lenders may enforce the guarantee, and what steps business owners can take if they find themselves in this situation.

Key Points

• Merchant cash advances typically require a personal guarantee from the business owner.
• Upon default, the lender can enforce the personal guarantee and pursue the owner’s personal assets.
• The lender may file a lawsuit and obtain a judgment to collect the outstanding balance.
• Business owners are typically liable for the full debt under the personal guarantee.
• Several defense strategies may be available, including a usury violation claim, state law violations, or challenging an improper merchant cash advance contract.

What Is a Personal Guarantee in a Merchant Cash Advance Contract?

A personal guarantee in a merchant cash advance contract is a legally binding promise made by the business owner or other guarantor to be personally responsible for repaying the advance if the business cannot meet its obligations. Even though an MCA may not require the business to provide physical collateral like a commercial real estate loan, the lender may require a personal guarantee.

A personal guarantee in a merchant cash advance contract typically means that the business owner:

• Agrees to be personally liable for the MCA debt and to permit the lender to pursue their personal assets if the business fails to pay.
• Waives certain legal defenses they might otherwise be able to assert to avoid personal liability, such as protections against collection from personal assets.
• Accepts joint and several liability for the debt, which means they can be held responsible for the full amount of the MCA contract, even if the business is no longer operating, has filed for bankruptcy, or the business has no assets left to pay off the debt.

If a merchant cash advance contract requires a personal guarantee, then the agreement may become a type of hybrid financing agreement, part commercial debt and part personal liability. If the business defaults, the lender can collect from the business and then attempt to collect the entire debt from the owner if the business’s assets do not fully satisfy the debt.

Enforcing the Personal Guarantee in an MCA Agreement

Enforcing a personal guarantee in an MCA agreement generally requires the following steps after a business defaults on the merchant cash advance:

• Notification of Default: The business typically receives a notice of default or a collection letter from the lender informing the business that it is behind on its payment obligation and at risk of a lawsuit to recover the outstanding balance.
• Commercial Collection Efforts: The lender or a collection agency may demand payment from the business or pursue commercial collection actions to collect the debt. The lender may use tactics such as wage garnishments or property liens against the business, or it may file a UCC-1 financing statement against the business assets. The lender may continue to demand payment from both the business and the business owner under the personal guarantee.
• Lawsuit: If the collection efforts fail, the lender may file a lawsuit against both the business and the personal guarantor. The lawsuit may seek a judgment for the unpaid amount plus any penalties or legal fees.
• Judgment: If the court grants a judgment in favor of the lender, the lender may enforce the judgment by a variety of means, such as wage garnishment, levies, or bank account freezes.
• Enforcement of the Personal Guarantee: The lender may use the judgment from the court to enforce the personal guarantee. The lender may pursue collection actions against the personal guarantor’s personal assets, including their home, car, bank accounts, and other personal property, to satisfy the outstanding balance on the MCA.
• States Where MCA Agreements Are Enforced: The lender may have the option to sue the business and the personal guarantor in New York state court if the contract contains a New York choice of law or forum selection provision, or they may choose to sue in the state where the business operates.

If you have any questions about how jurisdictions or laws for enforcing a personal guarantee work, an experienced MCA defense lawyer can help you understand your rights.

Potential Defenses to a Personal Guarantee

If the business owner believes they are being unfairly held liable under a personal guarantee, they may be able to present defenses to their personal liability in court with the help of an MCA defense attorney. Common defenses to a personal guarantee include:

Usury Violations

If an MCA agreement can be legally recharacterized as a loan, then the agreement may be subject to state or federal usury laws that limit the amount of interest that can be charged on loans. If the MCA contract is found to violate usury laws, the personal guarantee may be declared invalid or unenforceable.

Statute of Frauds

The statute of frauds is a legal doctrine that requires certain types of contracts to be in writing and signed by the parties. If the personal guarantee in an MCA agreement is not in writing or is not properly signed, it may be unenforceable.

Misrepresentation or Fraud

The personal guarantor may be able to challenge the enforcement of the personal guarantee by asserting that the merchant cash advance contract was obtained through misrepresentation or fraud. It will likely be difficult to assert that a personal guarantee that the business owner signed was obtained through fraud, but it may be possible to argue that the contract is unenforceable if the contract contained misrepresentations or materially inaccurate statements about its terms and conditions.

Lack of Consideration

In contract law, “consideration” refers to anything of value that is exchanged between parties to a contract. If the personal guarantor did not receive any consideration for providing the guarantee, then the personal guarantee may be unenforceable.

Coercion or Duress

A personal guarantee may be unenforceable if it was signed under coercion or duress. For example, if the lender threatened to withhold funding to the business unless the business owner signed the personal guarantee, then any agreement that resulted from that threat may be unenforceable.

Improper MCA Contract

A personal guarantee may be unenforceable if it’s found to be part of an improper MCA contract. Generally speaking, an MCA contract is improper if it does not meet the definition of a valid MCA and is instead more akin to a commercial loan or some other form of financing.

Lack of Authority

If the person who signed the personal guarantee did not have the authority to bind the business or themselves personally, the personal guarantee may be unenforceable.

Failure to Mitigate Damages

The personal guarantor may be able to challenge the enforcement of a personal guarantee for a merchant cash advance contract by proving that the lender didn’t take reasonable steps to mitigate their damages. In this case, the lender would have tried to pursue collection action against the business or the business’s assets without success.

Protecting Yourself If You Have Defaulted on an MCA with a Personal Guarantee

If you have defaulted on a merchant cash advance with a personal guarantee, consider the following steps immediately:

• Seek Legal Advice: Consult with a merchant cash advance defense attorney as soon as possible. An attorney can review the MCA contract and the personal guarantee to determine whether the lender has a valid claim against your personal assets and, if so, what defenses may be available.
• Communicate with the Lender: The lender may be open to negotiation if you have not yet missed a payment or if an attorney has identified potential defenses you can use to challenge the MCA agreement. For example, you may be able to negotiate a forbearance, restructuring, or settlement of the debt. Your attorney can help you negotiate the best deal possible.
• Stay on Top of the Lawsuit: If you have already defaulted on an MCA agreement, the lender could file a lawsuit at any moment. Pay close attention to any court dates or deadlines and respond to any legal documents promptly so you can assert all available defenses.

How the Merchant Cash Advance Attorneys Can Help

Merchant cash advance contracts are usually drafted to benefit the lender and may contain harsh provisions that are highly unfavorable for business owners. An experienced MCA defense attorney can help if you have defaulted on a merchant cash advance with a personal guarantee. We can review the contract and the personal guarantee to determine whether the lender has a valid claim against your personal assets. We can also advise you on your legal rights and options, and represent you in court or in negotiations with the lender. Depending on your circumstances, we may be able to:

• Defend you against a lender’s attempts to collect on the personal guarantee.
• Challenge the validity of the personal guarantee.
• Negotiate a settlement with the lender.

Contact a Merchant Cash Advance Defense Attorney Today

Defaulting on a merchant cash advance with a personal guarantee can have serious financial and legal consequences. However, you may have defenses and options available to avoid personal liability under the agreement. By taking proactive steps and seeking legal assistance, business owners can protect themselves and their assets. If you’re facing a default on an MCA, contact an experienced MCA defense attorney.