Defaulting on a Merchant Cash Advance (MCA) can have significant consequences, both financially and legally. MCAs don’t operate like traditional loans, so defaulting can impact your business in ways that may be surprising. Here’s a breakdown of what can happen and steps you can take to address it.
1. Immediate Collection Actions
MCA agreements usually include aggressive collection measures. Many MCAs require daily or weekly payments directly from your revenue. If you default, providers may start immediate collection processes, freezing your business bank accounts or using third-party collectors to recover the debt. Unlike traditional loans, these collection actions can happen fast and with little warning.
2. Confession of Judgment Clauses
Some MCA contracts include a “confession of judgment” (COJ) clause, allowing the lender to pursue legal action without notifying you first. A COJ lets the lender get a court judgment against your business immediately upon default, potentially leading to asset seizures, frozen accounts, or liens without prior warning. Some states have recently banned COJs for small business loans, but they’re still allowed in others, so always review your contract carefully.
3. Impact on Credit and Future Financing
MCA defaults can hurt your business and personal credit, limiting access to future financing options. MCA providers sometimes report defaults to credit bureaus, which can lower your score and make it harder to qualify for loans with favorable terms. Additionally, other lenders may view MCA defaults as a red flag, making it challenging to secure traditional funding in the future.
4. Additional Fees and Debt Spiral Risk
MCA providers often tack on substantial fees and penalties in the event of a default. If you miss a payment, the total amount owed can increase rapidly due to high fees, making it even harder to pay off the debt. This can lead to a “debt spiral,” where you’re forced to take out additional advances or loans just to cover payments, trapping you in an endless cycle of debt.
What You Can Do
If you’ve defaulted on an MCA, consider working with a financial advisor or attorney to negotiate a more manageable payment plan with your MCA provider. Restructuring the debt, or exploring other funding options, may help reduce the pressure of MCA collections and give your business room to recover.
Defaulting on an MCA has serious implications, but by understanding your options, you can take steps toward financial stability and protect your business’s future.