What Happens if I Default on a Merchant Cash Advance?
Defaulting on a merchant cash advance (MCA) isn’t like missing a payment on a standard business loan. The rules are different, and that debt is toxic, and it’s impossible to keep up if you fall behind on your MCA payments. At DelanceyStreet Debt Relief, we’ve seen that pretty soon your cash flow is crushed when you miss daily payments: a business misses a few daily payments, the MCA provider issues a default notice, and within days the entire debt may be accelerated—along with mounting fees. Understanding how MCAs work, and what your options are when you default, can help you protect both your business and personal assets.
How One Merchant Cash Advance Can Lead to Another—and Pretty Soon Your Cash Flow Is Crushed
A merchant cash advance is an advance on your future receivables—often tied to your credit card sales. The repayment is usually daily or weekly, calculated via a “factor rate” that can make the effective cost much higher than a traditional interest rate. If you miss those payments:
-- Your entire balance can be called due
- You might face extra penalties and default fees
- The MCA provider could potentially seize your receivables or freeze your bank accounts
It’s not always a simple conversation with the lender. Once they consider you in default, they can act fast, especially if there’s a Confession of Judgment (COJ) or a personal guarantee involved.
The Reality of Confessions of Judgment
A Confession of Judgment (COJ) allows the MCA provider to file a judgment against you without a traditional court hearing. States like New York have historically allowed COJs, although some legislation now limits their use for out-of-state borrowers. Still, if your MCA contract includes a COJ—and you signed it—your lender can potentially get a judgment, garnish accounts, or seize assets without you having a chance to argue your side in court.
If there’s also a personal guarantee, the monthly payments can quickly drown you in debt if the MCA provider calls a default: one day your business bank account is locked, and the next day you realize they’re coming after your personal funds, too.
Legal and Tax Consequences of Default
Once you default:
-- Potential Lawsuits: The MCA provider can sue for breach of contract, especially if you’re late multiple times.
- Confession of Judgment Enforcement: If a COJ is on file, they can move quickly to get a judgment without a normal trial.
- Personal Liability: A personal guarantee can mean your own home or personal checking account is at risk.
- Tax Implications of Settlement: If any portion of your debt is forgiven, that forgiven amount might be taxable under 26 U.S. Code § 61(a)(12). The MCA provider could issue a 1099-C, creating a new tax bill.
If you haven’t prepared for that tax bill, either way, now that debt is toxic, and it’s impossible to keep up before you even realize what happened. This is why we tell clients to consider all potential outcomes before rushing into any settlement agreement.
Table: Key MCA Default Risks and Potential Approaches
| Risk | Impact | Possible Approach |
|---|---|---|
| Acceleration of MCA Debt | You may owe the entire outstanding balance immediately | Contact the MCA provider to negotiate or enroll in a business debt relief plan |
| Frozen Bank Accounts or Garnishments | COJ or court order can let the lender freeze/garnish accounts or assets | Seek immediate legal counsel to challenge the COJ or negotiate a settlement |
| Personal Liability | If you signed a personal guarantee, your personal assets could be seized | Explore consolidation or a settlement strategy; speak to an attorney |
| Tax on Forgiven Debt | Forgiven amounts can be counted as taxable income | Prepare for a potential 1099-C; consult with a tax professional |
| Multiple Defaults (Stacking) | Overlapping MCAs can amplify cash flow challenges and lawsuits | Consider a single debt consolidation loan; restructure all debts into one |
Exploring Strategies for Relief
- Negotiate Directly
Many MCA providers want to get paid, rather than see you file bankruptcy. Explain your financial circumstances and request a modified payment plan. Lenders sometimes agree to reduce the daily payment or extend the term. Not all will listen, but it’s worth trying before they involve attorneys. - Consolidate Your Merchant Cash Advances
If you have several MCAs, the practice of stacking merchant cash advance loans can quickly sink a business. A debt consolidation loan might let you pay them off and then make just one monthly payment at a lower interest rate. It’s recommended you take advantage of these financial options to manage your debt with cheaper forms of financing if you’re juggling multiple daily or weekly debits from different MCA providers. - Pursue a Formal Settlement
Sometimes, you can settle for less than you owe. No lender wants you to file bankruptcy, so offering a lump sum might convince them to negotiate a final payoff. Just remember the possible tax consequences if the debt is reduced. - Challenge the MCA Contract Legally
In some cases, your agreement might be ruled a disguised “high-interest loan” if it violates state usury laws. If there was deceptive language or extremely high factor rates, it requires immense knowledge of the law, great negotiation skills, and the ability to fend off potential lawsuits in order to challenge it. Legal action can be time-consuming, but if the contract is illegal or unfair, you might prevail. - Bankruptcy as a Last Resort
No lender wants you to file bankruptcy. Yet, if you can’t keep up with the accelerating MCA debt, Chapter 7 or Chapter 11 might bring temporary relief through the automatic stay, giving you time to restructure or address the debt. But this can have long-term implications for both your business and personal credit.
How DelanceyStreet Debt Relief Helps
We focus on open communication with lenders. When you enroll with us, we immediately review your contracts, check for personal guarantees, examine any COJs, and analyze your finances—like your P/L statements, balance sheets, and cash flow. Then we engage with your MCA provider(s) to see if they’re willing to renegotiate:
- Reduced Principal or Lower Rates: Sometimes we can get them to lower your total debt or stretch your term.
- Consolidation Options: We explore if a single consolidation loan or line of credit can absorb your existing MCAs.
- Legal Support: Since our firm is owned by an attorney, we have a sister law firm that can step in if you’re sued or if there’s a COJ.
Our aim is simple: keep your business operational, reduce your total obligation, and you’re creating a way to avoid going out of business. We’ve seen too many entrepreneurs lose their businesses over an MCA default. Regardless—we can help you if you’re worried about an MCA default.