Defaulting on a loan can be a daunting and financially damaging experience, especially if you’re a small business owner. A merchant cash advance (MCA) is a type of business financing that is typically easy to access but can be risky and difficult to pay back if not managed properly.
It’s important to know what could happen if you find yourself unable to pay the debt back. This article will discuss what happens if you default on a merchant cash advance and what to do to get back on track.
- Defaulting on a merchant cash advance can damage your business credit score, your personal assets, and your financial reputation.
- There are major legal consequences for defaulting on a merchant cash advance, including the potential for a court judgment and the seizure of assets you or your business has.
- If you default on your merchant cash advance, you could be forced to pay your entire outstanding balance upfront.
- Merchant cash advance consolidations can help you avoid legal issues and pay down your debt in a more manageable way.
Consequences of Defaulting on a Merchant Cash Advance
When a business defaults on a merchant cash advance, there are a number of potential consequences that vary in severity.
- The business will be liable for repaying the full amount advanced plus any additional fees or interest that accrued throughout the loan period. This can obviously pose some serious issues for the business, not just due to the amount owed, but also due to the fact that the merchant cash advance provider may have several collection agencies working on their behalf in order to retrieve the money. This can lead to further monetary damages, such as overdue payment fees and collection costs, as well as reputational damage in the eyes of potential clients and other business partners.
- The merchant cash advance provider may choose to take legal action against the business. This may include hiring an attorney to pursue the delinquent loan payments, as well as the additional costs and fees that may be owed. The legal action may also extend beyond the company itself to the employees and/or owners if they are found to be liable for the defaulted payments. If the legal action is successful, the business may be forced to liquidate assets in order to cover the debt. This could be the end of business in some cases.
- You will likely face difficulty securing financing from other lenders in the future. This is because the credit history of your and your business will be impacted by the failure to fulfill the debt obligations.
Understanding Merchant Cash Advance Defaults
Merchant cash advances are a type of business financing that enable owners to access large sums of money, often within a few days' time. However, the risk of defaults is always present and it is important for business owners to understand the potential consequences of defaulting on a merchant cash advance.
When a business defaults on a merchant cash advance, the following may happen:
- The merchant may be subject to late fees, legal fees, and other charges.
- The merchant may have their collateral seized and may be forced to sell their collateral in order to pay off the debt.
- The merchant may be subject to aggressive collection actions and legal harassment.
How Does an MCA Work?
A merchant cash advance is a type of financing that provides a lump sum of cash to a business in exchange for a percentage of future sales. MCAs are typically used to quickly and easily obtain necessary working capital for short-term financing needs like purchasing inventory or upgrading equipment that unexpectedly broke.
The MCA provider will purchase a set portion of a business's future sales at a discount and advances the cash to the merchant in one lump sum. In return, the merchant pays back the advance plus the fee over a predetermined period of time. Payments are typically debited directly from the merchant’s bank account, ensuring that the business repays the MCA provider quickly and efficiently.
What is a Confession of Judgment?
A Confession of Judgment (COJ) is an agreement between you and the merchant cash advance company that states the MCA provider can pursue legal action to collect the outstanding amount if the merchant fails to make payments and defaults on the loan.
If that sounds scary, it’s because it is. If you default and can’t pay, the MCA provider can start seizing assets to pay down your debt, which could put a halt to your entire business. The use of a COJ is generally seen as a more aggressive form of collection and should only be used as a last resort in order to prevent business operations from being shut down.
What Happens if Your Business Misses MCA Payments?
If your business misses payments, you’ll be subject to charges and fees. Depending on your agreement, you may also face an increased interest rate.
If you fully default and stop making payments altogether, your lender may attempt to recoup the balance due through garnishment of bank accounts, collection phone calls, repossession of goods, or other methods. Moreover, the lender may sell your outstanding debt to a third-party debt collector, who could then pursue repayment. This could have a negative effect on your credit score and credit history.
The worst-case scenario is the MCA provider takes you to court and you could end up having to pay legal fees on top of the actual debt you took out through the provider.
What Happens When Business Defaults on an MCA?
Defaulting on a merchant cash advance comes with some serious financial consequences. You may face several legal repercussions, which vary depending on the terms and conditions of the MCA agreement you signed. In general, you likely agreed to one of these types of contracts:
- A confession of judgment occurs when a business agrees to confess its debt on record and to allow the lender to collect the debt without further dispute or defense. It allows the lender to obtain a judgment against the debtor, who forfeits the right to appeal a decision or raise any disputes. The confession of judgment mostly eliminates the borrower's defenses and allows the lender the ability to bypass a long trial process.
- A cognovit note is similar to a confession of judgment, but instead of the lender having unlimited rights to pursue a judgment, the cognovit note includes limitations that the borrower and lender have agreed to. It allows them to resolve the situation without involving a court of law or the need for a lengthy court process.
What Is a Merchant Cash Advance Lawsuit?
A merchant cash advance lawsuit refers to a legal action initiated by a merchant cash advance company against a borrower who has defaulted on their repayment obligations. If a borrower has not paid back the merchant cash advance they have taken out, the lender may begin a lawsuit claiming non-payment of their debt. This lawsuit will likely ask for both the full balance of the loan, as well as any applicable interest and other fees.
In some cases, the repayment terms outlined in the loan agreement may provide borrowers with legal protections. Borrowers should be sure to read and thoroughly understand the terms of their loan agreement so they are aware of any legal protections available to them should the need arise.
What Happens After a Judgment is Filed Against Your Business by an MCA Lender?
Once a judgment is filed against your business by an MCA lender, there are several things to expect.
- The lender may begin collection proceedings. This can include wage garnishment, taking money out of your bank account, seizing assets, or putting a lien on your property.
- The lender may report your default to the credit bureaus. This can severely impact your credit score and make it difficult for you to obtain future financing.
- The lender may sue your business to recover its capital. This can lead to further legal expenses, lost time and resources, and potential administrative fees.
These steps can be severe, but can often be mitigated with the help of a professional debt negotiator, who can help you find a solution that both parties can agree to.
How to Avoid Defaulting on a Merchant Cash Advance
Avoiding default on a merchant cash advance can help save you a huge headache and a whole lot of cash. Here are a few ways to help ensure payment:
- Streamline your cash flow. A savvy business owner should make sure that their cash flow is managed tightly. By keeping an eye on expenses and being prepared for sudden shifts in cash flow, a business can avoid lapsing on payments.
- Know your payment schedule. Make sure that you fully understand the payment schedule and repayment terms of your advance. If you find that this payment plan doesn’t work with your financials, contact your MCA company immediately and see if you can work out a different arrangement.
- Keep communication open. If there is a problem with repaying a merchant cash advance loan, you should communicate your concerns to lenders as soon as possible. Open communication is the best way to come up with a realistic plan that helps you pay the loan while keeping your business operations in good condition.
- Utilize a payment plan: If you can’t make the full payment, look into crafting a payment plan with your lender or the collections agency, if it’s gotten to that point.
What to do in Case of a Merchant Cash Advance Lawsuit
Alright, the worst has happened. You’re hit with a lawsuit by your MCA lender. So, what do you do now?
- Seek help from a lawyer. The best thing a business owner can do is to seek out the advice of a professional attorney. The lawyer will be able to provide guidance on the legal process and advise on the best course of action.
- Review the terms of the loan agreement. Make sure the lawsuit is valid and that the merchant cash advance company is within its rights to pursue legal action.
- Determine your best defense. For example, will filing for bankruptcy be beneficial or is a repayment plan the best option? Consider all possibilities and seek the advice of a legal professional.
- Negotiate with the merchant cash advance company. Depending on the situation, a business owner may be able to negotiate a payment plan or other terms to avoid legal action. Make sure to get any agreements in writing and approved by a lawyer.
- Keep detailed records of all communication with the merchant cash advance company. Document any emails, letters, or phone conversations between the business owner and the company.
- Avoid contact with the merchant cash advance company. Unless contact is necessary for negotiations, avoid communicating with the company. Your legal representative should take care of that.
- Attend court proceedings. If the case is taken to court, be sure to attend all scheduled hearings. Take necessary legal action and do your best to prove the accusations made against you are not valid.
How to Get Out of a Merchant Cash Advance
When feeling constrained by the repayment structure of a merchant cash advance, there are some steps you can take to decrease the burden.
- Consider if you can pay off the balance in one lump sum. Doing so could save you money in overall interest as well as form a sense of financial freedom. Then, avoid this type of loan at all costs.
- Look for ways to increase your profits in order to more easily handle the payments. This can include increasing your business’s online presence, expanding products and services, and improving customer follow-up or rewards programs.
- Consider renegotiating the terms of the merchant cash advance. This can include discussing a lower rate of repayment or an extended repayment period, which could provide you with more relief in the short term. Contact the lender before you reach the defaulting stage, though. They’re more likely to work with you if you’re open and honest about your financial situation, not when you’re dodging payments.
- Consider consolidating the debt into one new loan with a lower interest rate. If you have several existing MCAs or any other type of high-interest debt, you may want to consider combining them into one loan. This can be done by applying for a business loan or personal loan, both of which tend to have more favorable terms than MCAs.
- Contact an attorney to discuss your options before making a payment decision. An experienced lawyer can advise you on further steps to take and also can act as a mediator if you and the lender do not come to an agreement.
Useful Resources for Businesses Looking to Get Out of Debt
Debt can be terrifying, especially if you’re already struggling to keep your business afloat. Here are a few companies dedicated to helping small businesses get out of debt:
- National Federation of Independent Business (NFIB): Offers small business owners access to legal services, debt counseling, and other financial and management advice.
- Small Business Administration (SBA): The SBA provides guidance and resources for small businesses to handle debt and get back on their feet.
- Business Debtline: A free impartial debt advice service for businesses, helping them to prioritize debt and make an effective payment plan.
- The Debt Advice Foundation: Provides free debt advice, information, and money management services to help entrepreneurs understand their debt situations and make the right decisions.
- SCORE: A non-profit counseling service that helps small businesses understand their debts and debt collections and create a plan to get out of debt.
Defaulting on a merchant cash advance could be a dangerous mistake for your business. Doing so can mean hefty penalties, additional interest, and other fees. It can also severely damage your credit score, making it difficult to secure future financing.
For any entrepreneur hoping to use their time, money, and resources as efficiently as possible, defaulting on a merchant cash advance should always be considered a last resort. It's important to remember that it's not just the business that suffers in a situation like this—it's the people, too. Before making any decisions, be sure to carefully consider your options.