6 Ways MCA Contracts Define Default (Including Ones That Aren't Missed Payments)

Too many business owners assume that, like in loan agreements, non-payment is the only way to default on their merchant cash advance (MCA). However, payment is often not the focus of the default provision in an MCA contract. Funders expect to get paid in full even if you no longer have the future receivables. The most common ways MCA providers define default are:

Your payment to the funder was stopped or revoked

Interfering with the authorized payment to the funder is an almost universal event of default. Sometimes referred to as an "unauthorized ACH block," business owners usually do this because they are worried about running out of money, especially if it is approaching payroll. By placing a stop payment, revoking the authorization, or instructing the bank to block the funder's debits, you are violating your contract. In the event of a default, the full amount owed, plus fees and penalties, may become immediately due - not just the daily payments.

You diverted the company's income or redirected future receivables

When an MCA provider "purchases" your future receivables, it expects to get paid out of the revenue deposited into the business's operating account. Any actions that stop your funds from going into the account on file, such as opening a new account without notifying the provider, could constitute a default. The way this happens often starts off simply, and is a rational thing to do for the merchant. The funder is withdrawing too much each day. The daily payment is wiping out your account. So the merchant opens a new account to switch their business to. Many merchants aren't aware that all funds they receive have to go into the account on file, no matter how little revenue you're taking in.

Taking out a second MCA

Most agreements include "no additional debt" covenants, sometimes very broad ones. They generally prohibit additional financings during the term of the advance, or during any period when any future receivable, also known as Purchased Amount, remains undelivered to the funder. Funders look for stacks aggressively, and they often learn about new ones even before you receive the money, due to UCC filings and networked broker pools. Because there are no filing requirements with merchant cash advance providers, it's common for providers to discover the second advance after they already started getting paid. In many cases, MCAs are subordinate to each other, which means the obligations to one provider must be satisfied before the merchant can make payments to the others. If the merchant takes on a second MCA, the provider could use this as grounds for filing a lawsuit.

Selling the business

Not everyone goes through tough times. Perhaps you run your business with few bumps and decide you want to sell it for a good price. The problem is, almost every merchant cash advance has provisions to prevent merchants from making this very move. Transfer restrictions are typically triggered by selling your business, or substantially all of its assets. Some agreements include more extreme terms, such as relocating your business, or closing your business, without written consent from the funder.

Breach of Representations and Warranties

When you enter into an MCA contract, you are representing that all the information you gave was truthful: the application being accurate, your bank statements being correct, and your business being solvent, to name a few. Even if you meet the payment terms, these are separate terms you must also meet to not violate your contract.

Missed Payments

It's probably no surprise that one way to default on an MCA is to miss payments, known as "rejected debits." Many contracts state that you default after a specific number of payments are missed - sometimes as little as three during the lifetime of the MCA. Although many agreements lack one, a cure period allows for a few more missed payments before the funder could exercise default.

Non-payment is often not the only event that may be considered a default in the eyes of the provider. To help ensure you have an effective defense strategy, reach out to one of our merchant cash advance lawyers today.

The information presented in this article is for general informational purposes only and should not be considered legal advice. Each case is unique and the outcome of your particular case will depend on many factors, including the specific facts of your case and the state and federal laws that apply. Past results are not a guarantee of future outcomes. For detailed information and legal guidance, please consult with an attorney.