Default On My Merchant Cash Advance
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What Happens If I Default On My Merchant Cash Advance?

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New York Commercial Litigator

+11 years of practicing law. Founder of Colonna Cohen Law, PLLC. Featured in The City and The New York Post. Cases cited by the FTC and state attorney general offices in successful actions against predatory lenders.

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Director of Operations

Natasha Vulin
Oversees operations at Colonna Cohen Law, PLLC. Known for her reliability, organization, and compassionate client care. Plays a key role in client intake, case management, and strategic preparation, ensuring seamless service for business borrowers nationwide.  
Default On My Merchant Cash Advance

Defaulting on a Merchant Cash Advance (MCA) can have severe repercussions for small business owners. MCAs are financing agreements where businesses receive upfront funds in exchange for a percentage of future sales. While they offer quick access to capital, the terms can be complex and, if not managed carefully, can lead to significant financial distress.

Understanding Merchant Cash Advances

An MCA provides businesses with immediate funds by selling a portion of their future receivables. Unlike traditional loans, MCAs do not have fixed repayment schedules or interest rates. Instead, repayment is tied to the business’s sales volume, with lenders collecting a predetermined percentage of daily credit card transactions or bank deposits until the advance is repaid.

Consequences of Defaulting on an MCA

Defaulting occurs when a business fails to meet the terms outlined in the MCA agreement. This can happen due to declining sales, mismanagement, or unforeseen economic challenges. The consequences of defaulting can be severe:

  1. Aggressive Collection Actions: Lenders may initiate aggressive collection efforts to recover the owed amount. This can include daily withdrawal attempts from business bank accounts, leading to overdraft fees and further financial strain.
  2. Legal Enforcement Measures: Many MCA agreements include provisions that allow lenders to take legal action swiftly. This can result in:
    • Bank Account Freezes: Lenders can obtain court orders to freeze business bank accounts, halting all financial operations.
    • Property Liens: Lenders may place liens on business assets, including equipment and real estate, restricting the owner’s ability to sell or leverage these assets.
    • UCC-1 Filings: By filing a UCC-1 financing statement, lenders publicly declare a security interest in the business’s assets, which can deter other potential creditors or investors.
  3. Damage to Business Relationships: In some cases, lenders may notify a business’s clients or customers of the default, demanding that payments owed to the business be redirected to the lender. This not only disrupts cash flow but can also harm the business’s reputation and client trust.
  4. Escalating Debt: The high costs associated with MCAs, including fees and factor rates, can cause the debt to escalate quickly. If a business is already struggling, defaulting can lead to a debt spiral that’s challenging to escape.

Legal Protections and Recourse

While the consequences of defaulting are daunting, businesses have legal protections and options to mitigate the impact:

  • Challenging Unlawful Enforcement Actions: Not all lender actions are legally permissible. For instance, if a lender attempts to seize assets outside their jurisdiction or without proper authorization, businesses can challenge these actions in court.
  • Negotiating Settlements: Open communication with the lender can sometimes lead to renegotiated terms or settlement agreements that are more manageable for the business.
  • Seeking Legal Counsel: Engaging with attorneys experienced in MCA litigation can provide businesses with strategies to defend against aggressive collection tactics and protect their assets.

Preventative Measures

To avoid the pitfalls associated with MCAs:

  • Thoroughly Review Agreements: Before entering into an MCA, businesses should carefully review the terms, possibly with legal counsel, to fully understand the obligations and risks involved.
  • Assess Repayment Capabilities: Ensure that the business’s cash flow can support the repayment structure without jeopardizing operations.
  • Explore Alternative Financing: Consider other financing options with more favorable terms, such as traditional loans, lines of credit, or equity financing.

While Merchant Cash Advances offer a quick solution for businesses in need of immediate capital, they come with significant risks. Defaulting on an MCA can lead to aggressive collection actions, legal challenges, and damage to business relationships. However, with proactive measures, thorough understanding, and appropriate legal support, businesses can navigate these challenges and protect their operations.