What Happens if I Default on a Merchant Cash Advance?
What Happens if I Default on a Merchant Cash Advance?
Defaulting on a Merchant Cash Advance (MCA) can feel like that debt is toxic, and it’s impossible to keep up—especially if your bank account is negative, you have multiple stacked advances, and you’re worried you’re about to go out of business. At Delancey Street, we’ve worked with hundreds of business owners who first realized they were in distress—but discovered there are strategies to mitigate the damage and avoid going out of business. Below, we’ll help explain what happens when you default on an MCA, what the law says about it, and how our team can help you navigate this complex situation.
Understanding the Default Process
An MCA isn’t technically a “loan.” Instead, you sold a portion of your future receivables in exchange for upfront funding. Despite that distinction, defaulting on an MCA can result in strained relationships with creditors and vendors. Often, the first sign is that your daily or weekly debit from the MCA provider gets returned due to insufficient funds. Then, default interest, penalties, and potential legal action can begin immediately.
If you signed a COJ (Confession of Judgment), the MCA provider might file it in court—sometimes without notifying you—leading to immediate judgments that can freeze your bank accounts.
Key Takeaway: Many MCA agreements include an “acceleration” clause, meaning if you miss even one payment, the entire outstanding balance can be demanded at once. Given the monthly payments can quickly drown you in debt, it’s important you consider your options at this stage.
Potential Consequences of Default
- Account Freezes & Judgments
A Confession of Judgment can let the MCA provider bypass a normal court process, resulting in huge financial issues if the lender uses the COJ. - Seizure of Assets
If there’s a UCC-1 filing—or if you signed a personal guarantee—the MCA provider may try to seize business or personal assets. - Accumulating Fees & Interest
Default fees, late charges, and higher interest rates can quickly drown you in debt. - Credit Damage
Both your business credit—and your personal credit if you signed a personal guarantee—can become toxic if you don’t address the debt. - Tax Implications
Settlements or partial forgiveness of debt may result in a 1099-C for the amount forgiven—which can be considered taxable income by the IRS.
Legal Landscape and Why It Matters
State Laws play a huge role in how quickly a lender can enforce a judgment. For instance, if you operate in New York and signed a COJ, the MCA provider can quickly obtain a judgment upon your default. Other states treat COJs differently—and in some places, they’re not enforceable at all.
Because MCAs are structured as a “receivable purchase,” many lenders argue usury laws don’t apply. Some courts have challenged that argument, issuing notices of default or further scrutiny to see if certain MCAs are de facto high-interest loans. Whether your MCA falls under usury regulations can be complicated—it’s why legal counsel is crucial.
Practical Scenarios: From Bouncing Payments to Frozen Accounts
- Sudden Default
You’ve been making on-time daily pulls, but an unexpected slowdown makes it impossible to keep up. The MCA tries to debit your account, you fail to make the payment, and you’re now in default. The monthly payments can quickly drown you in debt, and you start receiving continual calls from your creditors. If there’s a COJ in play, you might see a judgment freeze on your account within days. - The Practice of Stacking Merchant Cash Advances
You have multiple MCAs, each pulling daily amounts. One by one, you can’t keep up—and everything results in strained relationships and potential default. The lenders may sue you in parallel—or a single lender might use your personal guarantee—resulting in huge financial issues for you, both business wise and personally.
In both scenarios, you might worry you’re about to go out of business. But we’ve found that when business owners take proactive steps—like contacting the MCA provider or considering debt relief strategies—it can help you manage your debt more effectively.
Table: Key Pitfalls and How They Impact You
| Pitfall | Impact | What to Do |
|---|---|---|
| Missing a Daily Pull | Triggers automatic default clauses | Call the MCA provider ASAP to negotiate a temporary reduction |
| Ignoring Legal Notices | Leads to a COJ or lawsuit without your response | Consult an attorney immediately to prevent a default judgment |
| Stacking merchant cash advances | Can quickly sink your cash flow | Consider consolidation or settlement to simplify your debt load |
| Signing a Personal Guarantee Without Reading Terms | Personal assets at risk | Review all contracts carefully or engage legal counsel |
| Accepting “Blanket Liens” in Contracts | MCA provider may seize business equipment and inventory | Review carefully for existing liens or COJs |
Strategies to Avoid Shutting Down
1. Open Communication With MCA Providers
Lenders want to recoup their money—and many prefer negotiating over forcing you to close. If you can show realistic financials (like P/L statements or cash flow projections) and propose a workable plan, you might secure modified daily payments or a new repayment schedule. That said, some MCA providers are more aggressive than others—so speaking to them proactively might be helpful.
2. Debt Settlement or Restructuring
If you’re behind on several MCAs, a debt settlement might help you pay less than what you owe. Sometimes, the MCA provider agrees to take a lump sum or reduced settlement—because no lender wants you to file bankruptcy. Keep in mind, any forgiven amount might result in a 1099-C, and you’ll need to plan for that tax liability.
3. Merchant Cash Advance Consolidation
Instead of several merchant cash advances, you could roll them into a single consolidation. This often gives you more reasonable payment terms—and possibly a lower interest rate. You need to review carefully for existing liens or COJs—because consolidating might require cooperation from current MCA holders.
4. Exploring Bankruptcy Options
Filing bankruptcy can be a strategic move if you’re in a difficult position. Chapter 11 can let you reorganize your debts while you keep operating. Chapter 7 typically involves shutting down the business—either route requires careful consideration and expert legal advice.
5. Invoice Factoring
If your main issue is slow-paying clients, invoice factoring can give you access to immediate cash. By factoring your receivables, you could pay down or settle the MCA. One of the issues—if the MCA provider has a blanket lien on your receivables, factoring might require negotiation with them first.
How Delancey Street Can Help
At Delancey Street, we focus on all types of unsecured business debt—including merchant cash advances. Because we’re owned by an attorney—Steven Raiser—we have a sister law firm ready to provide legal insight if you face lawsuits or a COJ. Our approach includes:
- Immediate Assessment: We review your MCA contracts, your current balances, and any notices of default or legal actions.
- Proactive Negotiation: Our team reaches out to lenders on your behalf, aiming to reduce the total amount owed, stretch out the payment schedule, or secure a lump sum settlement.
- Data-Driven Strategy: We rely on your up-to-date balance sheets and cash flow statements to show lenders that working with you is better than forcing you into bankruptcy.
- Legal Support: If you’re already in litigation—or have a COJ filed against you—our legal partners can step in to defend and negotiate more favorable terms.
Final Thoughts
Defaulting on a merchant cash advance doesn’t have to mean you’re going out of business—yes, you could face lawsuits, account freezes, or personal liability—but there are real, tangible steps you can take to protect yourself. Being proactive—whether it’s calling your MCA provider, exploring debt consolidation, or speaking with a legal professional—is often the key to working with your lender so you don’t have to close.
At Delancey Street, our team has helped businesses facing toxic levels of debt navigate negotiations, settlement, and even complicated legal scenarios—like multiple MCAs and confessions of judgment. If you feel like you’re about to go out of business—you do have options—and we can help you manage your debt from start to finish.