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What Happens If I Default on a Merchant Cash Advance?
Taking out a merchant cash advance can provide much-needed working capital for a small business. However, failing to repay the advance as agreed can have serious consequences. Here’s an overview of what happens if you default on a merchant cash advance.
How Merchant Cash Advances Work
First, it’s important to understand what a merchant cash advance (MCA) is and how repayment works.An MCA provides a lump sum of capital to a business in exchange for a percentage of future credit card sales over a set period of time. This is different from a term loan in that there is no set repayment schedule. Instead, the funding company takes a fixed percentage of daily credit card receipts until the full amount plus fees and interest is repaid.The advantage is there are no fixed monthly payments. The downside is that the total cost can add up quickly if sales don’t meet expectations.
What Triggers a Default
You will default on your MCA agreement if you:
- Fail to achieve the minimum amount of daily card volume stated in your contract over an extended timeframe
- Close your business or file for bankruptcy
- Change merchant accounts or banks without notifying the MCA provider
Stopping the automatic payments from your merchant account is also grounds for default. Some agreements require you notify the lender if sales drop more than 10-15% as well.
Consequences of Default
Defaulting on an MCA can negatively impact both your business and personal finances. Common consequences include:
- Full balance due immediately – The remaining balance plus fees will be demanded straight away. This can total 2-4X the original advance amount.
- Personal guarantee enforcement – If you personally guaranteed the advance, the lender can pursue legal action against you directly. This exposes personal assets.
- Merchant account hold – The MCA provider can put a hold on your merchant account so all funds get routed to them by default. This hampers cash flow.
- Damaged business credit – Defaulting will harm your business credit scores with agencies like Experian and Equifax, hampering future financing.
- Higher rates – Expect to pay significantly higher MCA rates in the future due to damaged credit.
- Collection calls & lawsuits – Unpaid balances will be sent to collections. Eventually you may face court judgements.
Strategies to Avoid Default
To avoid the painful consequences above, be proactive if you anticipate missing payments:
- Open communication – Talk to your MCA provider early about payment issues. See if they can shift the percentage taken or offer other repayment options before defaulting.
- Refinancing – If possible, refinance with another MCA provider to get lower rates and more favorable terms, consolidating balances.
- Business debt relief – Consult with a business debt relief firm about negotiating settlements on your behalf to resolve MCA debts.
- Payment restructuring – Ask if the lender will restructure to smaller, more manageable fixed monthly payments instead of the variable percentage.
- Line of credit – Explore shifting some payments to a business line of credit or credit cards to provide more flexibility.
- Alter budget – Reduce expenses in other areas or raise additional capital to fulfill MCA payment obligations.
While options exist, it’s vital to act quickly at the first sign of distress before default occurs. This maximizes the chances of negotiating alternative repayment plans.
How Do Merchant Cash Advance Defaults Compare to Other Financing Defaults?
Many small business owners take out financing from various sources beyond merchant cash advances. So how does defaulting on an MCA compare to falling behind on other types of business loans and lines of credit?There are a few key differences to be aware of.
Default Triggers
With most bank loans or SBA loans, you technically default after missing just one monthly payment. The lender will send a default notice giving you a chance to become current again.With an MCA, it usually takes 90+ days of consistently breaching the minimum sales volume before the provider considers you in default. There is more flexibility before default with an MCA.
Credit Reporting
Defaulting on a bank loan will directly hit your business credit report and FICO SBSS credit score. This data gets factored into approval decisions for future financing applications.MCA defaults do not directly impact business credit profiles in most cases. However, unpaid debts may end up in collections, eventually reaching your business credit file if left unaddressed.
Legal Recourse
Banks and the SBA have standard remedies when loans default, like seizing collateral assets or pursuing court ordered judgements. The process is usually stricter.MCA providers also have legal rights to collect debts, but some may be more willing to negotiate settlements or payment plans outside of court depending on circumstances.So the recourse process tends to be more variable and discretionary with MCA defaults based on the individual lender.
What Legal Protections Exist When Disputing an MCA Default?
Dealing with an aggressive merchant cash advance provider after an alleged default can be stressful for a business owner. Fortunately, some consumer protection laws do exist.
Fair Debt Collection Practices Act
The federal FDCPA regulates the actions of third-party debt collectors. Protections include:
- Restrictions on when and how collectors can contact you
- Validating disputed debts
- Preventing harassment, threats, deception, or misrepresentation
- Requiring verification before reporting unpaid debts
The law generally applies to third party collection agencies. But courts have also held some MCA providers directly liable under the FDCPA in certain cases after assignment of the debt.
State Collection Laws
Many states have additional legislation around debt collection practices beyond federal law. For instance in New York, collectors are prohibited from:
- Contacting your workplace if asked not to
- Disclosing the debt to unauthorized third parties
- Simulating a legal process without actually taking action
- Collecting on time-barred debts past the statute of limitations
Check if your state has extra protections that may apply.
Substantiating Claims
If an MCA provider alleges you defaulted, request documentation validating the total balance demanded and proof interest rates comply with state usury caps.Errors do happen, so never assume claims are automatically valid. Review supporting records carefully for discrepancies.Push back if collectors cannot produce agreements with your signature or substantiate missed payments and fees. Don’t hesitate to dispute inaccurate debts.
How Can a Business Debt Relief Company Help With MCA Defaults?
Trying to singlehandedly negotiate an affordable settlement after defaulting on a merchant cash advance can be difficult, especially when facing aggressive collection tactics.Business debt relief services specialize in these situations. Their experienced negotiators have practical insight into the MCA industry.A business debt relief firm essentially acts as your representative to deal with collectors on your behalf. Benefits include:
- Removing the emotional stress of handling disputes yourself
- Bringing extensive knowledge of lender psychology and tactics
- Spotting overcharges or violations of collection regulations
- Leveraging their scale to negotiate discounts off balances
- Allowing you to focus on operating your business
Reputable companies like Delancey Street have relationships with many MCA funders. This facilitates arranging reasonable compromises that protect your business assets and credit.They also offer customized debt restructuring and consolidation plans combining various relief options like refinancing, lines of credit, payment schedules calibrated to your revenue, and more.Bottom line – you don’t have to tackle merchant cash advance defaults alone. Business debt experts can shield you from harassment while developing solutions so you can move forward.
What Legal Defenses Might My Business Have Against an MCA Default Claim?
Facing legal action over an alleged default on a merchant cash advance can be intimidating. Fortunately, certain defenses may apply that could eliminate or reduce your liability.An attorney experienced with MCA agreements can assess if any of the following protections fit your situation:
Unconscionability
If the total repayment amount under your MCA contract is excessively above the original funding amount, a lawyer may argue the terms are unfairly imbalanced. This legal principle is called unconscionability.While deferred payment transactions do justify some premium, certain providers exploit small businesses with rates that are arguably predatory. If found unconscionable by a judge, an agreement may be invalidated.
Usury Violations
State laws restrict the maximum interest rates lenders can charge on financing deals. If your effective MCA interest rate exceeds caps due to default fees, your contract could potentially be void.For example, New York usury laws invalidate loans exceeding 16% APR for small businesses. Complex MCA agreements can obscure true costs, so legal analysis is key.
Breach of Contract
If the MCA provider did not fulfill promises made verbally or in your written agreement, but still demands full repayment, you may claim breach of contract.One example is not receiving funding by a guaranteed date critical for business operations. Their contractual breaches could release your company from obligations.Assessing potential defenses takes experience. So don’t hesitate to discuss options with legal counsel if hit with an MCA default lawsuit.
What Are Some Hardship Programs or Relief Options MCA Lenders Could Offer?
When small business sales hit a rough patch, falling behind on a merchant cash advance is not uncommon. Many MCA providers understand this reality of operating a business dependent on variable revenue streams.In some cases, rather than immediately demanding full accelerated repayments after a default, a lender may present hardship assistance alternatives. Potential relief options include:
Payment Moratorium Temporarily stopping payments for 1-3 months provides breathing room until business income stabilizes. Interest still accrues during the moratorium however.
Interest Rate Reduction Lowering the interest rate from the original agreement or removing certain fees can cut down the total balance owed. This makes catching up more affordable.
Modified Payment Schedule Renegotiating the payment structure from a variable percentage of daily sales to smaller fixed installments is often possible. This assists in budgeting management.
Extended Repayment Timeline Pushing back the payoff date by 6-12 months reduces the weekly/monthly burden to free up operating capital for turning business performance around.
Partial Balance Forgiveness In limited cases, the lender may agree to waive a portion of the outstanding debt after default based on new negotiated terms and timeframes.
Re-advancing Additional Funds If extra working capital could clearly aid in reversing revenue declines, some MCA companies may provide further financing at reduced rates despite the delinquency.To access hardship concessions, being proactive, communicating openly about challenges, and demonstrating good faith efforts to eventually achieve compliance are all critical.Defaulting on an MCA should not be taken lightly given the potential consequences. But practical options often do exist for struggling business owners. Seeking expert assistance can be key to identifying customized relief solutions in difficult situations.
Key Takeaways
- Merchant cash advance defaults occur after missing payments over an extended period based on the contract terms. Consequences range from demands for immediate full repayment to merchant account holds.
- Defaults on MCAs can be less cut and dry than with other financing options. Some providers may offer hardship assistance like payment moratoriums based on circumstances.
- Certain laws provide protections when disputing debts, though MCA companies have wide latitude in collection practices. Debt relief services can help secure reasonable settlements.
- Legal defenses around unconscionability, usury violations or breach of contract may apply in some cases where providers overreach after an alleged default.
While defaults should not happen, options exist for struggling business owners. The key is being proactive with lenders and seeking expert help early when facing financial hardship or aggressive collections pressure after falling behind on an MCA
