What Happens When You Default On Merchant Cash Advance? A Guide To Moving Forward

Defaulting on a loan can be overwhelming and financially damaging, especially for small business owners. A merchant cash advance (MCA) offers easy access to funds but can be risky and challenging to repay if not managed properly. In this guide, we’ll explain what happens if you default on an MCA and outline the steps you can take to get back on track.

Understanding Merchant Cash Advances

A merchant cash advance provides a lump sum of cash to a business in exchange for a percentage of future sales. MCAs are often used to obtain necessary working capital for short-term financing needs. This is such as purchasing inventory or upgrading equipment.

The MCA provider purchases a set portion of a business’s future sales at a discount and advances the cash to the merchant in one lump sum. The merchant then repays the advance plus the fee over a predetermined period. Payments are typically debited directly from the merchant’s bank account for quick and efficient repayment.

Default on Merchant Cash Advance: Consequences

Repayment Obligations

The business will be liable for repaying the full amount advanced plus any additional fees or interest that accrued. This can bring about serious issues, as the MCA provider may involve several collection agencies to retrieve the money.

This can result in further monetary damages. It can contribute to overdue payment fees and collection costs, as well as reputational damage in the eyes of potential clients and business partners.

Legal Action

The MCA provider may choose to take legal action against the business. This includes hiring an attorney to pursue the delinquent loan payments and any additional costs and fees.

Legal action may also extend beyond the company to the employees or owners if they are found liable for the defaulted payments. Successful legal action may force the business to liquidate assets to cover the debt, potentially ending the business.

Difficulty Securing Future Financing

Defaulting on a merchant cash advance can make it challenging to secure financing from other lenders in the future. This is due to the negative impact on the credit history of both the business and the owner, resulting from the failure to meet debt obligations.

What is a Confession of Judgment?

A Confession of Judgment (COJ) is an agreement between you and the MCA provider that allows the provider to pursue legal action to collect the outstanding amount, if the merchant fails to make payments and defaults on the loan.

If you default and can’t pay, the MCA provider can start seizing assets to pay down your debt which could halt your entire business. The use of a COJ is generally seen as an aggressive form of collection and should only be used as a last resort.

What Happens if Your Business Misses MCA Payments?

If your business misses payments, you’ll be subject to charges and fees. Depending on your agreement, you may also face an increased interest rate. Fully defaulting and stopping payments can result in garnishment of bank accounts, collection calls, repossession of goods, and the sale of your debt to a third-party collector.

These actions can negatively affect your credit score and history. The worst-case scenario involves the MCA provider taking you to court, where you may be required to pay legal fees on top of the debt.

Legal Repercussions of MCA Defaults

Defaulting on a merchant cash advance comes with serious financial consequences. You may face several legal repercussions, which vary depending on the MCA agreement you signed. Common agreements include:

• Confession of Judgment: This allows the lender to obtain a judgment against the debtor, who forfeits the right to appeal a decision or raise any disputes. It bypasses a long trial process and enables the lender to quickly collect the debt.
• Cognovit Note: Similar to a confession of judgment. However, this includes limitations agreed upon by the borrower and lender which allows them to resolve the situation without involving a court of law.

How to Avoid Defaulting on a Merchant Cash Advance

To avoid defaulting on a merchant cash advance, manage your cash flow carefully. Keep a close eye on expenses and be prepared for any sudden changes in cash flow to prevent missed payments. Make sure you fully understand your payment schedule and repayment terms. If the current plan doesn’t align with your financial situation, reach out to your MCA company right away to discuss alternative arrangements.

Besides, you must maintain open communication with your lender. Address any concerns as soon as they arise to help develop a realistic repayment plan. If you’re unable to make the full payment, work with your lender or collections agency to establish a manageable payment plan.

What to Do in Case of a Merchant Cash Advance Lawsuit

If you find yourself facing a merchant cash advance lawsuit, it’s important to take the right steps to address the situation. Start by consulting a professional attorney who can guide you through the legal process and advise on the best course of action. Review the terms of your loan agreement to ensure that the lawsuit is valid and that the MCA company has the right to pursue legal action.

Consider your best defense options, such as filing for bankruptcy or negotiating a repayment plan, and seek advice from your lawyer on these possibilities. If appropriate, negotiate with the MCA company to establish a payment plan or other terms to avoid further legal complications. Make sure any agreements are documented in writing and reviewed by your lawyer.

Keep detailed records of all communications with the MCA company, including emails, letters, and phone calls. Unless necessary for negotiations, avoid direct contact with the company and let your legal representative handle all interactions. Lastly, attend all scheduled court hearings, take necessary legal actions, and present your defense effectively.

How to Get Out of a Merchant Cash Advance

If possible, paying off the balance in one lump sum can save on interest and offer financial relief. Another approach is to increase your business’s profits by enhancing your online presence, expanding your products or services, and improving customer follow-up or rewards programs.

You might also renegotiate the terms of your advance by discussing a lower repayment rate or an extended period with your lender. It’s best to reach out before defaulting to improve your chances of securing a favorable agreement.

Consolidating debt is another option. You can combine multiple high-interest debts into one loan with a lower interest rate, either through a business or personal loan with better terms than MCAs. Lastly, consulting an attorney is crucial before making any payment decisions. An experienced lawyer can help mediate negotiations if you face challenges with your lender.

Useful Resources for Businesses Looking to Get Out of Debt

Debt can be overwhelming, especially if you’re struggling to keep your business afloat. Here are some resources dedicated to helping small businesses manage debt:

• National Federation of Independent Business (NFIB): Offers small business owners access to legal services, debt counseling, and financial advice.
• Small Business Administration (SBA): Provides guidance and resources for small businesses to manage debt.
• Business Debtline: A free impartial debt advice service helping businesses prioritize debt and create effective payment plans.
• The Debt Advice Foundation: Offers free debt advice, information, and money management services.
• SCORE: A non-profit counseling service that helps small businesses understand their debts and create a plan to get out of debt.

Moving Forward with Value Capital Funding

Defaulting on a merchant cash advance can be a challenging experience, but it doesn’t have to spell the end for your business. At Value Capital Funding, we offer MCA debt restructuring, MCA debt relief, and MCA debt consolidation services to help you handle these difficult times.

Our solutions and professional guidance provide a path forward without any new loans, no minimum FICO score, no collateral, and no upfront fees required. Contact us today to discover your financing options and start a journey toward financial success.