From Initial Penalties to Potential Legal Consequences
For small business owners, a Merchant Cash Advance (MCA) can be a means to scale your business or a lifeline during a cash flow crunch. However, because they often have high-frequency repayment structures and high costs, it is easy to fall behind.
If you find yourself unable to meet your daily or weekly remittances, you are facing an MCA default. Understanding how Merchant Cash Advance agreements may respond to missed payments can help business owners better anticipate potential operational and contractual challenges.
Is an MCA a Loan?
It is important to understand that technically, a Merchant Cash Advance is not a loan. Instead, it is the purchase of your future receivables. MCAs are often structured differently than traditional loans and may be governed by different commercial contract principles, depending on jurisdiction.
This distinction is the primary reason why MCA lenders, at times, use more aggressive collection tactics than traditional banks.
Common MCA Default Challenges Businesses May Encounter
Defaulting on an MCA isn't a single event. It’s a process that escalates. Depending on the agreement, lender, and jurisdiction, businesses that fall behind on MCA remittances may encounter a range of contractual or operational responses.
1. Daily/Weekly Payment Failures and NSF Fees
If your bank account lacks the funds for the scheduled ACH withdrawal, you could see the default process begin.
- The Consequence: Your bank will likely charge a Non-Sufficient Funds (NSF) fee. Simultaneously, the MCA company could charge a "rejected payment" fee, often ranging from $50 to $100 per instance. If you miss three days of payments in a week, these fees can snowball before you even speak to a representative.
2. Aggressive Internal Collections
Once the system flags your account as delinquent, the lender's internal collections department will start calling.
- The Consequence: Expect frequent phone calls, emails, and texts. At this stage, lenders may also reach out to your emergency contacts or business partners. Their goal is to create a sense of urgency and pressure you into making a catch-up payment.
3. UCC Liens and Notice to Your Merchant Processor
Because the lender purchased your future sales, they often file a UCC-1 financing statement when you first take the funding.
- The Consequence: Upon default, the lender may attempt to assert their contractual rights by contacting third parties referenced in the agreement, depending on the terms and applicable law. Depending on the contract, a lender may communicate with parties involved in processing receivables as part of an enforcement effort.This can effectively choke your cash flow, making it challenging to pay employees, rent, and other necessities.
Coastal Debt Resolve is not a law firm and these materials do not constitute legal, financial, or professional advice.
4. Breach of Contract and Personal Guarantee Claims
Many MCA agreements include a Personal Guarantee of Performance. While the MCA is a business transaction, you likely signed a document stating that you personally guarantee the business will not interfere with the lender’s ability to collect the receivables.
- The Consequence: If the lender decides you have breached the contract, in certain situations, contractual provisions may expose individuals to personal liability, depending on how the agreement is structured.
5. Confessions of Judgment
In some jurisdictions, MCA contracts include a clause known as a Confession of Judgment (COJ).
- The Consequence: In general terms, a COJ is a contractual mechanism that may allow a lender to seek court involvement without following the same procedural steps required in traditional litigation. Whether such provisions are valid, enforceable, or applicable depends on multiple factors, including how the agreement is structured and where enforcement is attempted. It is important for business owners to understand that:
- Not all MCA agreements include these provisions
- Not all jurisdictions permit or recognize them
- Even where included, enforceability is not automatic and may be subject to legal challenge
Coastal Debt Resolve is not a law firm and these materials do not constitute legal, financial, or professional advice.
6. Bank Account Freezes and Asset Seizure
In some situations, an MCA default leads to contractual disputes that may escalate into formal collection actions, which can disrupt access to operating funds.
- The Consequence: The scope and likelihood of these actions vary widely based on the agreement and applicable law. This is the stage where, in some cases, it can be difficult for a business to continue normal operations.
How to Handle an MCA Default
For some business owners, a Merchant Cash Advance (MCA) can provide fast access to capital during periods of opportunity or cash flow strain. Because of their repayment structure and contractual design, however, falling behind on remittances can introduce operational and contractual challenges.
This article provides general educational information about how MCA agreements may respond to missed payments and why understanding those dynamics can help business owners make more informed decisions. Outcomes vary widely based on contract terms, lender practices, and jurisdiction.
Don't wait. Contact Coastal Debt Resolve today for a free consultation to discuss your options.
Services provided exclusively for businesses. Not consumer or personal debt relief.
Results vary based on business circumstances and creditor participation.
Debt resolution outcomes are not guaranteed.
*Coastal Debt Resolve is not a law firm and does not provide legal advice. When appropriate, businesses may be referred to or coordinate with independent legal professionals retained separately by the client.
Frequently asked questions
A default typically occurs when you fail to meet the specific repayment terms outlined in your MCA agreement. The most common cause is having insufficient funds in your bank account for the daily or weekly ACH withdrawals.
In many cases, yes. While an MCA is technically a purchase of future sales and not a traditional loan, almost all contracts include a Personal Guarantee. This means that if the business cannot pay, the funder can pursue your personal assets, including your personal savings, vehicles, or even your home.
It can. While many MCA funders do not report regular payments to consumer credit bureaus, a default often leads to: Legal Judgments: Public records of lawsuits and judgments that appear on both business and personal credit reports. Collections: If the debt is sold to a third-party collection agency, they may report the delinquency, causing a significant drop in your score.
A COJ is a clause in some MCA contracts where you waive your right to a defense and allow the lender to summarily enter a judgment against you. It is dangerous because it allows the funder to bypass the standard legal process. * Note: Many states, including New York, have recently limited the use of COJs against out-of-state borrowers.
Yes. Because an MCA is a "purchase of future receivables," the funder technically owns a portion of your incoming sales. If you default, they may notify your customers or credit card processor via a UCC lien and demand that all future payments be sent directly to them instead of your business.
