Merchant cash advances, which are funding arrangements that were designed to help small businesses, have gained popularity over the past few years. These advances, which are often provided by alternative lenders, offer fast cash. Despite the speed and convenience, many borrowers who are strapped for cash find themselves dealing with high costs and short repayment terms. As a result, there is a growing question: What is the default rate for merchant cash advances, and what happens if you cannot repay them?

Why Merchant Cash Advances Are Risky

A merchant cash advance (often called an MCA) is an advance that was given based on a percentage of future receivables. The MCA provider, which can be a private lender, forwards money to the business. In return, the lender collects a daily or weekly amount from the business’s revenue, until the MCA plus fees are repaid.

Because these products that were created to help businesses can carry factor rates that are significantly higher than typical interest rates, many borrowers default. Some industry analysts who have studied this space estimate the default rate could range anywhere from 10% to 30%. There is no central government agency that was assigned to track this data. As a result, it is difficult to know the exact number.

If your cash flow is interrupted, you could miss payments. This can create a downward spiral where penalties that are added by the MCA provider make the total balance grow quickly. Missed payments can trigger collections efforts, which can result in legal action.

Potential Penalties for Defaulting on MCAs

A default that was declared by your lender might lead to serious consequences. These could include:

• Personal Liability: Many MCA agreements that were signed by business owners contain personal guarantees. This means you, as the owner, might be held personally responsible for the debt if your business cannot repay it. This can lead to wage garnishment or even lawsuits against you personally.
• Confession of Judgment (COJ): Some MCA contracts include a COJ, which is a legal document that was designed to allow the MCA provider to get a judgment without a normal lawsuit process. If you signed a COJ, the lender can file it in court and immediately attempt to seize assets or garnish income. This can put your personal and business finances at extreme risk.
• Property Liens: A lien that was placed against your business property could affect your ability to sell assets or obtain more funding.
• Damaged Credibility: If you default, your business credit profile can be harmed, which might make it harder to get other loans or financing down the road.

Crimes and Punishment: Could It Become Criminal?

A default on an MCA is typically considered a civil matter. However, there are situations that were documented in which a business owner might face criminal charges if the lender can prove there was fraud. For example, if someone who was applying for the MCA made false statements on the application, or knowingly took the MCA with no intention of paying it back, the lender might allege fraud. Fraud that was committed could bring criminal prosecution. According to the U.S. Department of Justice (https://www.justice.gov), penalties for financial fraud can include heavy fines or imprisonment.

If you did not commit fraud, a simple default is usually not criminal. Still, the possibility that a lender could allege fraud means you should tread carefully. Ignoring letters or phone calls can make it seem like you are hiding. If you keep open communication and show a willingness to pay, you might avoid allegations of wrongdoing.

Legal Information and Citations

Understanding your rights as a borrower is essential. The Federal Trade Commission (https://www.ftc.gov) advises that small business owners must read all contracts carefully. The Consumer Financial Protection Bureau (https://www.consumerfinance.gov) notes that any debt that was incurred by a small business could be subject to specific federal and state regulations.

Even though the MCA industry itself is not regulated the same way banks are, you still have consumer protection laws in many states. States that have strong usury laws may place caps on the amount of interest or fees a lender can charge. If you believe that your MCA contract is predatory, you could reach out to your state’s attorney general office or the SBA (https://www.sba.gov) for guidance.

Possible Consequences of a Default Notice

1. You receive a letter that was sent by the MCA provider, which states you missed a payment.
2. You fail to respond, and the lender that issued the MCA might accelerate the debt, which means the entire amount is now due.
3. If you still do not pay, the MCA provider that was handling your agreement can file a lawsuit or use a COJ if it was part of the contract.
4. Once a judgment is entered, you might face bank levies, liens, or garnishments.

A judgment that was obtained by the MCA provider can stay on your record, which can affect your ability to borrow from future lenders.

Flow Chart: Escalation Path for MCA Defaults

Step 1 -> Missed Payment -> Consequence: Late fees, phone calls, and letters from MCA provider
Step 2 -> Default Notice -> Consequence: Acceleration of debt, demands for immediate full payment
Step 3 -> Legal Action -> Consequence: Lawsuit, possible confession of judgment, or arbitration
Step 4 -> Enforcement of Judgment -> Consequence: Seizure of assets, garnishment, or forced repayment

This process that was laid out is not set in stone; however, it gives a general sense of what might happen when defaults occur.

Strategies for Handling MCA Defaults

1. Open Communication: If you anticipate a missed payment, contact your MCA provider right away. Lenders who were blindsided by a lack of contact might escalate the situation faster.
2. Debt Restructuring or Settlement: Negotiating a new payment plan or attempting a lump-sum settlement might be a viable path. We, at DelanceyStreet.com, regularly help clients negotiate better terms.
3. Legal Defense: If the MCA provider sues you, you have the right to defend yourself. Evidence that was improperly collected, or contracts that were flawed, could be challenged in court. If evidence was collected illegally, there might be grounds to dismiss it, which can reduce the claim amount. That dismissal can lead to a more favorable negotiation, and it might save you thousands of dollars.
4. Business Debt Consolidation: You might consider getting a new loan or line of credit that was meant to pay off multiple merchant cash advances. This can help you consolidate them into one payment, which might come with a lower rate.
5. Seek Professional Help: Companies that specialize in business debt relief, such as DelanceyStreet.com, can bring in experienced attorneys or debt negotiation experts who know how to communicate with MCA providers.

How DelanceyStreet.com Defends You

We, at DelanceyStreet.com, are a top tier business debt relief company that was founded to help businesses nationwide. Our team knows how to negotiate with MCA companies and, when necessary, represent you in court alongside our sister-law firm.

Below is a quick outline of our approach:

• Assessment: We gather all your loan documents that were signed by you, along with your financial data, to understand the scope of your debt.
• Negotiation Plan: We speak directly to the MCA provider, which is sometimes open to reduced payments if we can show a hardship.
• Legal Defense: If a lawsuit was initiated against you, we coordinate with attorneys who are skilled at challenging unfair terms or demanding proof of claims. Lenders that are predatory might back down if their contracts cannot stand up to scrutiny.
• Ongoing Support: Throughout the negotiation, we keep you in the loop, answer your questions, and adjust our strategy as needed.