Are you a small business owner who was counting on a merchant cash advance (MCA) to be your lifeline? Maybe your sales didn’t pick up the way you hoped, and now you’re worried about missing payments. If you find yourself struggling with this situation, you might be asking: What actually happens if I default on an MCA loan? This article will help you understand what a default can mean for you, what penalties and potential legal issues you could face, and how a top-tier business debt relief company like DelanceyStreet.com might defend you.

Understanding MCAs and Defaults

A merchant cash advance, also known as an MCA, is an agreement that was designed to give you fast money in exchange for a portion of your future credit card or other sales. A lender, who is often called the MCA provider, gives you a lump sum up front. Then, you repay by having a set percentage of your daily or weekly revenue taken out until you pay the full amount, plus fees.

A default that was triggered on an MCA usually happens when you can’t keep up with the required payments. This might occur if you close your business, if you fail to deliver the agreed-upon daily payments, or if you violate other conditions in the contract. There are many possible reasons for missing payments, like a sudden drop in sales, unexpected costs, or other financial challenges that were out of your control.

Is Defaulting on an MCA a Crime?

Many people ask if failing to pay an MCA is a criminal offense. Defaulting on a loan that was legally obtained is almost always treated as a civil matter. That means, in most situations, you won’t be carted off to jail. However, if there was fraud—for example, if you lied on your application about your sales figures, or if there was a forged signature—then you could face criminal investigations. Fraud that was committed intentionally can be prosecuted, and that could lead to fines or even jail time.

Fraud is treated very seriously by authorities like the Federal Trade Commission (FTC.gov) or even federal prosecutors. If you’re worried that a lender might accuse you of misrepresentation, it’s important to speak to legal counsel right away. Regardless of the circumstances, remember: lenders want you to pay them back, not go to prison. But if they believe there was intentional wrongdoing, that is when you could face very serious legal penalties.

Civil Penalties and Consequences

When you default on an MCA, the provider can take civil action. This means you might be sued in court for the remaining balance, plus extra fees and costs. The contract that was signed often includes clauses allowing the lender to pursue you personally, especially if you signed a personal guarantee. A personal guarantee that was included in the agreement can leave your personal assets at risk if the business can’t pay.

1. Lawsuits
   A lawsuit that was filed against you will claim you owe the remainder of the advance, along with collection costs and default fees. If you lose the lawsuit, you might get a judgment against you. A judgment that was issued by the court could lead to bank account garnishments or liens on your property.

2. Confession of Judgment (COJ)
   Many MCA contracts include a confession of judgment that was granted as part of the original deal. A COJ can let a lender skip the usual trial process. If you default, the lender files the COJ with the court and obtains a judgment almost immediately. This means you have less time to fight back before the lender takes action.

3. Credit Score Damage
   A default that was reported to business credit bureaus can drastically lower your business credit score. This can affect your ability to get new loans or financing. If you used a personal guarantee, then your personal credit might be at risk too. A damaged credit score can increase the interest rates you pay on any future loans and might reduce your chances of getting needed capital down the road.

4. Aggressive Collections
   Some MCA providers rely on collection calls or emails that are relentless, which can be stressful. If you don’t act quickly, this situation can spiral into further legal costs, strained vendor relationships, and even more debt.

Criminal Allegations of Fraud

As mentioned before, simply defaulting on a debt that was validly borrowed usually is not criminal. But if the MCA provider believes you committed fraud, they may claim you obtained the MCA through false statements. A statement that was falsified can lead to an investigation by law enforcement. If there is enough evidence, charges could be filed in state or federal court.

Possible criminal penalties if fraud is proven:

• Heavy fines
• Probation
• Restitution payments
• Jail time, depending on the severity

These are real consequences that you don’t want to face, which is why it’s crucial to be honest when applying for any financing. If you made an honest mistake or if your business was hit by unexpected problems, you still have legal avenues to defend yourself and possibly work out a settlement.

Strategies Lenders Might Use Against You

Lenders often have skilled attorneys. They might try to freeze your accounts, place liens on your property, or garnish any remaining business revenues. If they believe you’re hiding assets, they could ask for an asset search or demand an inspection of your financial records.

A contract that was signed can sometimes have “bad boy” clauses. These are clauses that say if you do something the lender views as unethical—like transferring business assets to someone else—they might accelerate the entire debt, making it due immediately. This is why having professional help on your side is so important.

How We Defend You: DelanceyStreet.com

DelanceyStreet.com is a premier, and award winning, business debt relief company based out of NYC. We help clients nationwide who are in over their head with MCAs, credit card debt, SBA loans, and more. If you have defaulted on an MCA, or if you’re worried you might, we can help you explore strategies to protect your business and possibly avoid lawsuits.

Here are some steps we might take:

1. Immediate Communication with the Lender
   Many creditors prefer open dialogue. If you communicate, the lender might allow you to restructure the payments, so you have more time to pay. We can negotiate on your behalf and try to reduce the overall amount owed.

2. Examining the Contract for Illegal or Unfair Terms
   A contract that was signed in bad faith, or that contains abusive terms, could be challenged. We look for hidden fees, outrageous interest rates, or suspicious clauses. If we find unfair conditions, we can argue against them.

3. Negotiating Settlements
   We can focus on settlement agreements that might include lower monthly payments, reduced principle balances, or extended repayment terms. Achieving a workable settlement can keep you out of court and let you save money.

4. Handling Potential Lawsuits
   If you’re being sued, we will help gather evidence, craft a defense, and try to fend off a default judgment. Evidence that was obtained in an improper manner might be challenged. We can also review whether the contract was valid and if all the procedures were followed by the lender.

5. Exploring Debt Consolidation
   You may be able to get a business debt consolidation loan. This could replace your MCA with one single payment that has a more manageable interest rate. By merging multiple debts, you reduce the stress of juggling different due dates and obligations.

6. Protecting Your Personal Assets
   A personal guarantee that was included in your MCA contract can threaten your home, savings, or other assets. We explore methods that might shield your personal property from being seized, including certain protections under state or federal laws.

Potential Penalties and Their Consequences

Late Fees and Penalties:
A missed payment that was recorded can trigger penalty fees. Those fees might be small at first, but they can add up quickly. Once your debt grows, the chance of catching up might feel harder.

Legal Judgment:
A judgment that was entered against you can let the lender garnish your business bank account. If the lender has a confession of judgment on file, the process goes fast. You might find that your account is frozen or that money is taken before you realize a judgment was filed.

Bankruptcy Ramifications:
If the debt becomes too big, you might consider bankruptcy. Bankruptcy that was filed can possibly erase some unsecured debts, but it’s a drastic step. It will also impact your credit for years, making it tougher to get loans in the future. We can discuss if bankruptcy is a last resort option, or whether a settlement might be a better path.

What the Government Says

There is no single federal law regulating all MCA providers, but the U.S. Small Business Administration (SBA.gov) offers resources about responsible borrowing and debt relief options. The Federal Trade Commission (FTC.gov) enforces consumer protection laws that might apply if a lender uses deceptive practices. Keeping your eyes on official government websites is a wise step if you sense an MCA provider might be crossing the line.

Ways You Can Avoid or Solve Defaults

1. Speak to Your Lender Early
   Communication that was done proactively can help you avoid default. If your business is struggling with cash flow, let your MCA provider know. They might offer a revised payment structure.

2. Cut Unnecessary Spending
   Lower your expenses to show the lender you’re serious about repayment. A budget that was optimized shows that you aren’t wasting money. This can encourage the lender to work with you.

3. Refinance or Consolidate
   As soon as you see trouble, investigate consolidation or refinance options. A new lender that was brought in might pay off the old debt, leaving you with a single monthly payment. This approach could save your business from default.

4. Get Professional Help
   We strongly recommend consulting experts, whether it’s a business debt relief firm like DelanceyStreet.com or a licensed attorney. Professional counsel that was obtained quickly might prevent bigger problems down the road.

Remember: You Have Options

Many small business owners fear an MCA default because they think they’ll lose everything or end up facing criminal charges. The good news is that defaulting is not automatically a crime. You have legal rights and options to negotiate, settle, or fight unfair practices. DelanceyStreet.com is here to help you navigate this complex path.

Are you feeling overwhelmed by the pressure of an MCA default? Do you have multiple MCA debts that are suffocating your cash flow? Our team has extensive experience working with creditors. We can seek lower monthly payments, reduction in the total balance, and more time for you to focus on growing your revenue.

A Quick Word on Prevention

Always read your agreement that was signed, and make sure you understand its terms. If you spot any clause that seems alarming—such as a confession of judgment—get professional advice before you sign. Prevention that was exercised early can save you from stressful defaults later.