09 Sep 23

What Happens With A Merchant Cash Advance Breach Of Contract

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Last Updated on: 9th September 2023, 06:45 pm

What Happens With A Merchant Cash Advance Breach Of Contract

Business contract on table

A merchant cash advance (MCA) is a form of business financing in which a company receives an upfront lump sum payment in exchange for an agreed upon percentage of future credit card and/or debit card sales. The percentage is automatically deducted from the merchant’s credit card processing account on a daily or weekly basis.

Like any financing agreement, an MCA contract between the merchant and the funder contains specific terms and conditions. If either party breaches (violates) the contract, it can lead to serious consequences.

Common Breaches by Merchants

Some of the most common MCA contract breaches by merchants include:

  • Closing the business or stopping operations
  • Switching credit card processors without notifying the MCA provider
  • Intentionally diverting card transactions to avoid payments
  • Providing false information on the MCA application
  • Declaring bankruptcy without notifying the MCA provider

These actions violate the terms of the typical MCA contract and allow the funder to take action to recover their money.

Common Breaches by MCA Funders

On the other side, some common breaches by MCA funders include:

  • Taking more than the agreed upon percentage from daily credit card sales
  • Refusing to stop ACH debits after the MCA has been repaid in full
  • Sharing confidential business information with third parties
  • Harassing the merchant or merchant’s customers for payments

These types of actions break the contract terms and may make the funder liable for damages.

Consequences for a Merchant’s Breach of Contract

If a merchant breaches an MCA contract, the funder has several options to recover their investment:

  • Demand repayment in full – The funder can declare the merchant in default and demand immediate repayment of the entire outstanding balance rather than collecting payments over time.
  • File a lawsuit – The funder can sue the merchant for breach of contract and obtain a court judgment to collect what they are owed.
  • Report to credit bureaus – A default on the MCA can be reported to the business’s credit profile, harming their ability to get financing in the future.
  • Place a UCC lien – The funder can place a lien on the merchant’s assets, allowing them to seize collateral if necessary to satisfy the debt. [1]
  • Charge high default rates – The contract may allow the funder to charge the merchant hefty default interest rates (as high as 40%), making the balance grow rapidly. [2]

Depending on the specifics of the breach, the funder may pursue any combination of the above options to get repaid what they are owed under the MCA contract.

Merchant Defenses for Breach of Contract Claims

If a merchant is sued for breach of contract, there are a few potential defenses they can raise:

  • No breach occurred – The merchant can argue the funder has no proof of a contract violation.
  • Breach was justified – There are legal reasons that may justify a contract breach, like fraud or lack of consideration.
  • Improper contract formation – The merchant can claim the contract is invalid due to mistakes, lack of authority, or unconscionability.
  • Unclean hands – The funder acted unethically in making or enforcing the contract.
  • Setoff – The merchant has counterclaims against the funder for breach of contract.

If a merchant has evidence to support these defenses, they may be able to defeat a lawsuit and avoid paying damages. However, the burden of proof is on the merchant to show the breach of contract claim is improper or invalid. [3]

Consequences for an MCA Funder’s Breach

On the other hand, if the MCA funder is the party in breach, the merchant can take action such as:

  • Sue for damages – The merchant may be able to recover financial losses caused by the breach.
  • Seek an injunction – The merchant can request a court order to stop ongoing contract violations.
  • Withhold payments – The merchant may be justified in holding payments until the funder cures the breach.
  • Terminate the contract – An uncured material breach may allow the merchant to end the contract.
  • File complaints – Regulatory agencies like the FTC or state attorneys general can investigate funder misconduct.

Breach of contract claims against MCA funders may be difficult to prove, but merchants have options to enforce their rights under the financing agreement.