What Happens When You Default on a Merchant Cash Advance?

 

A Merchant Cash Advance (MCA) can be a critical tool for getting your business through tough economic times. When MCAs were first rolled out, they saw businesses receive a lump sum, cash payment in exchange from a funder in exchange for a percentage of future sales, typically carried out via debit or credit card. 

Today, the term “Merchant Cash Advance”’ is used to describe a number of emergency financing solutions for small and medium-sized businesses, which are less long-term and structured than traditional loans from banks and other financial institutions. 

An MCA could look like a lender giving a business a cash infusion, in exchange for a percentage of future daily sales for an agreed period of time. Many small businesses find MCAs particularly appealing because they provide a fast cash solution and typically don’t have stringent screening, meaning that they’re available to businesses with poor or minimal credit history.

MCAs serve an important purpose by providing small businesses with a cash injection that can help sustain operations and get companies through a rough patch, but the terms of an MCA are usually less favorable to borrowers than a traditional loan. 

Generally speaking, MCAs are characterized by their high interest rates and shorter time frames for paying back what you’ve borrowed. Unfortunately, this can lead to a scenario in which the borrower is unable to fulfill their end of the MCA agreement on time and ends up in default. 

Read on to learn more about what happens when you default on a merchant cash advance.

 

What is a Merchant Cash Advance Default?

Defaulting on a merchant cash advance occurs when a small business owner borrows a sum of money from a funder, and is unable to pay back the funds according to the terms of the advance agreement. Depending on the agreement, once a borrower has missed more than one payment, they are considered to be in default. 

There are countless reasons why a small business ends up defaulting on a merchant cash advance, from a widespread economic downturn that slashes sales to unexpected emergency expenses. 

But no matter the reason, once a borrower defaults on a merchant cash advance, there are actions the funder can take to recoup their losses, which will likely result in serious consequences for the small business.

 

What Happens if you Default on a Merchant Cash Advance?

If you default on your merchant cash advance, the funder has the right to secure the remainder of the advance, which can happen via a lawsuit aimed at seizing your assets, collateral, or other financial resources.

A merchant cash advance default lawsuit is an extremely common outcome when daily payments are missed. This means that the funder files a legal complaint against you in court, which is aimed at obtaining a judgment which will force you to legally surrender assets.

Even if you did not put up hard collateral for your merchant cash advance, the funder can still require you to turn over future sales, cash, or even your business assets like equipment and inventory. 

If you are served with a summons – a notice that you are being sued by your funder – it is critical that you immediately consult with an attorney and respond in a timely manner. 

If you fail to respond, the court can order a default judgment. That means that the funder will be granted whatever amount in damages that they’re asking for, with no opportunity for you to discuss alternate action plans or other solutions with your funder.

Hard numbers on the merchant cash advance default rate are difficult to find, but according to regulatory agencies, some bad acting MCA funders act in a predatory manner that leads to extremely high default rates.

The Securities and Exchange Commission (SEC) recently launched an investigation into an MCA funder with a staggering 50% default rate. The CEO of that lending company was arrested, and there are additional ongoing probes into other MCA lenders who have extremely high default rates.

 

How bad is it to default on a merchant cash advance?

We’ll give you the short answer: It’s bad. Defaulting on your merchant cash advance can have devastating consequences for your business and credit score. Your bank accounts, both personal and business, could be frozen, your business assets can be seized, and your future income could be surrendered to the funder.

The good news is that there are steps you can take, should you feel like an MCA default is on the horizon, that can spare you from the hardship and long-term consequences of defaulting.

The first step is to take a hard look at your expenses and see if there’s anything that you can cut back on, so that you free up cash to make your monthly MCA payment. While this might be uncomfortable in the present moment, it’s crucial that you are willing to make sacrifices now, so that you can protect your business’ future.  Second, you may consider reaching out to your funder and discussing a temporary reduction in the amount of your monthly payments. You may be surprised by how willing your MCA provider is to offer you hardship relief, should you reach out to them before missing a payment. At the end of the day, the funder may prefer getting some money from you rather than none at all, plus dealing with the hassle of filing a lawsuit.

Third, you can seek alternate small business financing options that will help you complete the remainder of your MCA. This could look like a traditional small business loan, which sees you put up collateral in exchange for longer-term, lower-interest funding.

While the idea of defaulting on your merchant cash advance may be scary, don’t despair! There are solutions available that can help you pay back your loan with your business and credit intact.