What Happens If You Default on a Merchant Cash Advance?

What Can Happen

If you fall behind on payments to a merchant cash advance company, your agreement may say they can call the debt due and try to collect the amount they say is left. If you signed a personal guarantee, they might try to enforce it. They may send notices to your customers and anyone who processes payments for you (e.g. credit card processor). They could sue. Much of this is not automatic, and none of it moves at a predictable pace. Exactly what can happen depends on the agreement, the facts, and the law.

Read through the agreement to see what it says about what you did wrong, and what you are supposed to do next. There may be a section about what happens if you default or go into default status. The agreement may say that certain steps have to happen before the lender can do certain things. Default notices may also state that you owe an amount that does not account for payments already made.

The agreement might say that sales dropping is a default, but default and decrease of revenue are not interchangeable. Try not to let language like default, late, past due, or other negative statements scare you into skipping the steps above. Being in default or breach could matter a lot, but the words alone do not mean you breached the agreement.

Some funders send a default notice in the beginning. They might call or email and demand the outstanding balance. You should be able to match the numbers between what you see in your books and what the merchant cash advance lender says is owed, and why.

A cash advance company may send a notice to your customers and others who pay you, claiming they have the right to some of your money. After receiving a proper assignment notice, the customer may only settle the bill by paying the merchant cash advance company, not you. Some customers may hold their money until this is sorted out. The notice may say something about the Uniform Commercial Code (UCC). Take down all you can about the notice.

They may threaten or bring a lawsuit. They can sue to enforce the personal guarantee if they got you to sign one. Look at the complaint to see how it compares to what is in your books, the agreement, and what happened. If you get notice of a lawsuit, take it to a lawyer, and find out what to do next. This is a serious matter. Do not let a default judgment get entered against you.

If you signed a confession of judgment, a funder may be able to use it instead of a normal lawsuit, but only where the law permits. New York lets these be filed only in the county where the debtor lived or does business, and only within three years of signing. In Texas, an agreement providing for sales-based financing that contains one is void.

If the merchant cash advance company wins their case, they may get a judgment against you for the money they say you owe. A restraint or levy of funds in a bank account normally follows a legal judgment or other process. Some companies hold funds after they receive a UCC notice. Find out which document caused your restraint, as each needs a different response.

Find the agreement and see if there was a personal guarantee, and if the merchant cash advance company said your personal obligations only start if you default, or also cover a breach. Take your agreement and the circumstances to a lawyer to find out what your options are.

Go to a Lawyer at Once

If you have a lawsuit or other legal action against you, you should go to a lawyer at once, and ask about anything that was mailed or emailed to you. Take down details about any default or other notices, including the date, sender, what you got, and what they are asking for. Put all the notices, receipts, and documents related to the advance in one place.

Compare the debits against what the contract says to make sure the company is following the terms. Look for duplicate, returned, or disputed withdrawals and anything that makes you question their numbers. If you have multiple merchant cash advances, keep track of each one. List each MCA, the funder, the payment rate and frequency, and the amount they say is outstanding. Don’t sign another agreement until you are sure what you are getting, and you can afford to pay for it.

Avoid moving money around, except with the help of a lawyer. Moving money between accounts can raise issues under the merchant cash advance agreement and under the law. Starting a new account does not get rid of the obligation. Do not tell customers a dispute is settled unless it is.

If sales drop for some reason, check if the MCA agreement has a reconciliation clause where you ask to have withdrawals recalculated based on what you actually brought in. If you have a reconciliation clause, follow its procedures and deadlines, and make copies of what you send. A reconciliation clause lets you ask the MCA to reconsider how much it is taking, but does not by itself put a hold on withdrawals or cancel a default.

Out-of-court Resolution

Options for out-of-court resolution include restructuring the MCA, settling the dispute, or seeking new financing. Restructuring could include changing how much or how often you pay. Be sure you get new terms in writing. Settlement resolves the dispute on agreed terms. Get a release for claims and personal guarantees. If the advance company forgives or reduces your debt, that canceled debt might be taxable income. An exclusion like insolvency could let you escape the tax, but check the law and your situation with an accountant.

If your business cannot meet its obligations and collection threatens operations, talk to counsel about bankruptcy early, not just when every other option has failed. A bankruptcy filing does more than put the business’ affairs into a court proceeding: it triggers an automatic stay that stops debt collection. Be aware that a business filing does not always free the owner who guaranteed the loan.