As a small business owner, sometimes you need extra cash to keep your business operating smoothly. Merchant cash advances (MCAs) have become a popular source of fast business financing. Unfortunately, they don’t have the same benefits and protections of a traditional business loan. The high fees and tricky contracts associated with MCAs can threaten your business and finances if you aren’t careful. If you’re in danger of defaulting on a merchant cash advance, it’s important to know how that could impact your business.
Read on to find out what happens if you default on an MCA, how to avoid it, and what to do if you’re already behind on payments.
Defaulting on a Merchant Cash Advance: What Happens Next?
If you miss one or more of your MCA payments, you are considered in default. Defaulting on a merchant cash advance is usually considered a breach of contract. As a result, defaulting on payments means the MCA funder can pursue getting that money from you and your business. They may attempt to freeze your personal and business bank accounts, as well as disrupt relationships with your vendors, payroll company, and more.
For example, they might file a UCC lien, which gives them priority to collect collateral if you aren’t paying back your debt. They may contact your vendors and payment processors and demand they pay the MCA lender directly.
Often, the MCA provider will also sue you in court. If successful, they can then take more aggressive actions to reclaim the money owed, such as seizing your assets.
What Is an MCA Lawsuit?
When an MCA company decides to sue a customer, they first have to send a court summons and complaint notice. This will explain why you’re being sued and include the deadline for responding with a formal legal pleading. The exact timeline for responding depends on where you’re located. In New York, for example, you have 20 days if it was physically handed to you. You’ll have 30 days if it was sent by some other means (like the U.S. mail).
It’s crucial that you respond to the lawsuit before the deadline. If you don’t, the MCA company can obtain a default judgment against you. That means you no longer have the ability to challenge or defend yourself against the lawsuit.
Unfortunately, some MCA contracts contain a “confession of judgment” clause (also known as an “agreed judgment”). This allows the MCA company to avoid going through the normal lawsuit process. They can obtain a judgment against you without notifying you or giving you the opportunity to defend yourself in court. They can then move quickly to seize business assets, freeze accounts, etc. in a matter of days.
Additionally, you may have been required to sign a personal guarantee when securing the MCA. This means that you are personally liable for the business debt. So your own assets and money could be at risk in a lawsuit.
Tips to Avoid Defaulting on a Merchant Cash Advance
As you can see, defaulting on an MCA can have serious implications for your business and finances. If you’re in danger of falling behind on MCA payments, it’s important to avoid defaulting, if possible. Below are a few steps you can try taking.
Look for Ways to Cut Costs
Since MCA payments are based on your receivables, they can take a big bite out of your cash flow. One way to make some more wiggle room is by cutting costs internally. Try hiring freelancers or contractors to save money on labor, or renting expensive equipment instead of buying it. You can also try renegotiating your terms with vendors or suppliers to lower costs.
Try to Restructure the Debt
When you’re in danger of falling behind on your MCA payments, it’s a good idea to contact the MCA company ASAP. These companies are notoriously unhelpful, but they may be able to restructure your deal if it means they’ll continue getting paid. For example, you might be able to negotiate a short forbearance period to give your finances some breathing room.
MCA contracts also contain a provision known as reconciliation or readjustment. If your business income falls, you probably won’t be able to make payments according to the original terms. So the MCA company must restructure the payments in a way that’s more affordable, or else they’d be considered a usurus (illegal) lender.
Consider Debt Consolidation
If you want to get out of your MCA contract, you could consolidate the debt. This involves taking out an installment loan and using the proceeds to pay off the MCA. Instead of having a portion of your sales deducted daily, you’ll be responsible for making one fixed, monthly payment over several years. The interest rate will likely be much lower, too. That’s especially true if you have good credit, which is required for a more traditional business loan. Overall, the repayment terms of a term loan are more favorable compared to an MCA.
In Danger of Defaulting on a Merchant Cash Advance? Hire a Debt Relief Lawyer for Help
Whether you’re worried about falling behind on MCA payments, defaulting on a merchant cash advance, or maybe even facing a lawsuit, it’s important to hire an MCA debt settlement attorney. Tayne Law firm has been working with clients to resolve MCA debt and other business and consumer debts for more than two decades. We can examine your situation and come up with a plan that helps keep your business running while getting debt collectors and ruthless MCA collectors off your back.
For example, our attorneys are skilled at negotiating business debt settlements. which could result in you paying less than what you owe. We have relationships with merchant cash advance companies and their legal teams, and understand the legal process that can impact your business. Focusing on your business should be your priority and having a team that can navigate the challenging world of MCA legal debt resolution may make the difference in your business surviving and ultimately thriving. The stress alone in dealing with MCA debt and business challenges can be debilitating — let us handle it for you and get you the best resolution possible for your business.
We offer a free phone consultation to get to know your business and its challenges. We will discuss what types of services we can provide including a strategy that makes sense to help you resolve your MCA debt. Don’t let your MCA debt problems get out of hand. Call us today toll free at (866) 890-7337 or fill out our short contact form. There’s no obligation and we never share or sell your information.