Quick Summary: If your merchant cash advance is in collections, act fast. MCA providers can freeze your bank account, seize business assets, or sue you without warning if your contract includes a confession of judgment. You have options: dispute the debt, negotiate a settlement, or work with an attorney to challenge unfair contract terms. The worst move is doing nothing.
How Do Merchant Cash Advances Work?
A merchant cash advance gives your business a lump sum of cash upfront. In return, the MCA provider takes a percentage of your daily or weekly sales until you pay back the advance plus fees.
MCAs are not technically loans. They are advances on your future sales. This matters because it means MCA providers don’t have to follow the same rules as traditional lenders. They can charge much higher rates and include contract terms that favor them heavily.
Instead of interest, MCAs use a “factor rate” to calculate what you owe. Factor rates typically range from 1.1 to 1.5. If you receive $50,000 with a factor rate of 1.2, you’ll pay back $60,000 total. That’s $10,000 in fees for what might be a few months of financing.
The high cost of MCAs is one reason so many businesses end up in trouble. Daily payments drain your cash flow, making it hard to cover other expenses. When sales slow down, the payments don’t stop, and you can fall behind quickly.
What Happens When an MCA Goes to Collections?
When you miss MCA payments, the provider can take aggressive action fast. Unlike traditional lenders who may work with you or wait before escalating, MCA companies often move quickly to protect their money.
Here’s what you may face:
Bank account freeze: Many MCA contracts give the provider the right to freeze or drain your business bank account if you default. This can shut down your operations overnight.
UCC lien enforcement: Most MCA agreements include a blanket UCC lien on your business assets. If you default, the provider can seize equipment, inventory, and accounts receivable. They can even contact your customers and tell them to send payments directly to the MCA company instead of you.
Confession of judgment: This is one of the most dangerous clauses in MCA contracts. A confession of judgment (COJ) lets the provider get a court judgment against you without a trial, without notice, and without giving you a chance to defend yourself. Once they have that judgment, they can seize assets immediately.
Personal guarantee enforcement: If you signed a personal guarantee, your personal assets are on the line too. Your home, savings, and other property could be at risk if the business can’t pay.
Why Are MCA Collections So Aggressive?
MCA providers move fast because they’re not regulated like banks. Since MCAs are technically purchases of future receivables (not loans), they fall outside most lending laws. This gives providers more freedom to include one-sided contract terms and take quick action when borrowers fall behind.
Many MCA contracts are written to favor the provider. Common provisions include:
- Confessions of judgment that skip the normal court process
- Blanket liens covering all business assets, including future sales
- Personal guarantees that put your personal property at risk
- Default triggers that kick in after just one missed payment
- Waiver of your right to dispute or defend yourself in court
The good news: some of these provisions may not be enforceable. New York banned confessions of judgment for out-of-state borrowers in 2019. An attorney can review your contract and identify terms that may be challenged.
What Can You Do If Your MCA Is in Collections?
You have more options than you might think. Here are the main paths forward:
Dispute the Debt
If the MCA provider violated debt collection laws, you may be able to fight back. You can also challenge the debt if the amount is wrong, if the provider can’t prove you owe it, or if they’re trying to collect more than the contract allows.
If you signed a confession of judgment, talk to an attorney right away. Depending on where you live and when you signed, the COJ may not be valid. An attorney can file to vacate (cancel) the judgment and give you a chance to defend yourself in court.
Negotiate a Settlement
Debt settlement means negotiating to pay less than you owe. Some MCA providers will accept a reduced amount to avoid a long legal fight or the risk of getting nothing if your business fails.
You can try to negotiate yourself, but it’s stressful and MCA companies often won’t take individual borrowers seriously. A debt settlement attorney has experience with these negotiations and knows what offers MCA providers are likely to accept. They can also handle all communication so you don’t have to deal with collectors directly.
Challenge the Contract
Some MCA contracts include terms that courts have found unenforceable. For example, if the contract is structured more like a loan than a true purchase of receivables, the provider may have violated usury laws by charging interest rates that are too high.
An attorney can review your contract and look for violations or unenforceable terms. If the MCA provider cut corners or broke the rules, you may have leverage to negotiate better terms or get the debt reduced.
File for Bankruptcy
Bankruptcy is usually a last resort, but it can provide relief when other options won’t work. Filing for bankruptcy can stop collections, give you time to reorganize, and in some cases discharge the debt entirely.
If you signed a personal guarantee, bankruptcy gets more complicated. An attorney can help you understand whether business bankruptcy, personal bankruptcy, or both might make sense for your situation.
What Should You Avoid Doing?
Some responses to MCA collections can make things worse:
Don’t ignore it. MCA providers move fast. If you don’t respond, they may freeze your accounts or get a judgment against you before you have time to react.
Don’t take out another MCA. “Stacking” MCAs (taking a new one to pay the old one) is a trap. You’ll pay even more fees and end up deeper in debt.
Don’t make promises you can’t keep. If you agree to a payment plan you can’t afford, you’ll default again and lose any goodwill you built with the provider.
Don’t assume you have no options. Even if your contract looks iron-clad, there may be ways to fight back. Talk to an attorney before giving up.
Get Help With MCA Collections
Defaulting on a merchant cash advance can threaten your business and your personal finances. But you don’t have to face it alone. An experienced debt relief attorney can review your contract, explain your options, and negotiate with MCA providers on your behalf.
Tayne Law Group has helped business owners deal with merchant cash advance legal issues for over two decades. We know how MCA companies operate and what strategies work to resolve these debts.
Call (866) 890-7337 for a free consultation, or fill out our short contact form. We’ll review your situation and explain your options with no obligation. All conversations are confidential.
Frequently Asked Questions
Can an MCA company freeze my bank account?
Yes. Many MCA contracts include provisions that let the provider freeze or withdraw funds from your business bank account if you default. This can happen quickly and without warning.
What is a confession of judgment?
A confession of judgment (COJ) is a contract clause that lets a creditor get a court judgment against you without a trial. You give up your right to defend yourself. If you signed one, the MCA provider can seize assets without giving you notice. New York banned COJs for out-of-state borrowers in 2019, so yours may not be enforceable.
Can I negotiate MCA debt on my own?
You can try, but MCA companies are often aggressive and may not negotiate seriously with individual borrowers. An attorney has legal leverage and experience that usually gets better results.
Will MCA collections affect my personal credit?
MCAs typically don’t report to personal credit bureaus directly. However, if you signed a personal guarantee and the provider gets a judgment against you personally, that can appear on your credit report and damage your score.
What if I already have a judgment against me?
You may still have options. An attorney can review how the judgment was obtained. If the confession of judgment was invalid or the provider violated proper procedures, you may be able to vacate (cancel) the judgment and defend yourself.
