Whether you’re ready to pursue a new opportunity or your business simply isn’t performing, there may be a time you decide to close up the business for good. And if that’s the case, you might wonder: “What happens to a merchant cash advance if my business closes?”
Closing a Business
According to the U.S. Small Business Administration, about half of small businesses fail by their fifth year in business. There are several reasons why a business might close. Some of the most common include:
- Bad location
- Lack of experience
- Poor management
- Insufficient capital
- Unexpected growth
- Personal use of funds
- Over-investing in fixed assets
- Poor credit arrangements
However, not all businesses close because they’ve failed. Sometimes, even profitable businesses close down for a variety of reasons.
What Happens if I Close My Business?
If you decide to close your business, there are generally several loose ends to tie up.
First, if you were operating as a corporation or limited liability company (LLC), it’s important to dissolve this entity officially. That way, you are no longer liable for business taxes or filings in your state. Dissolving your business lets creditors know you can no longer incur business debts.
If your business was a partnership, you might have to file a dissolution form with your state. This is likely if you were required to file paperwork with the state to form the partnership. Either way, it’s a good idea to file a dissolution officially. Again, this alerts creditors that you can no longer take on business debts. It’s vital for general partnerships or in situations where any single partner can sign a deal, but every partner is personally responsible for business debts.
It’s also important to cancel any licenses or permits you to hold so that no one else can fraudulently use your seller’s permit or business name. If that happens, you could be liable for any taxes or penalties incurred after you shut your business down.
What if I Still Owe Money?
When closing your business, there’s a good chance you have some outstanding business loans or other business debts like credit card debt and MCA debts. Your lenders may want to know your plan for satisfying these debts. Some creditors may want to inspect any business collateral or records that could be liquidated to cover some or all of the debt. Sometimes, you may need to work with creditors to settle what you owe. This can be complicated, and you may want to consider working with a reputable business debt attorney. If you do agree to any settlements, be sure to get the agreement in writing.
If you have an unpaid merchant cash advance (MCA), the purchaser will also want to ensure they’re paid according to the terms of the agreement. However, handling outstanding MCA debt may be trickier than a traditional bank loan or other debt. An MCA attorney can help guide you through a default or settlement process.
What Happens to a Merchant Cash Advance if My Business Closes?
Dealing with a merchant cash advance differs from a traditional business loan or line of credit. That’s because an MCA is not a loan at all. It’s an advance. Unlike traditional lenders, cash advance lenders offer short-term financing solutions based on your credit card sales or future revenue. In other words, MCA lenders purchase a portion of your future receivables and give you the money upfront. The MCA company then deducts a percentage of your daily credit card transactions (or other revenue) for 6-24 month repayment periods until the advance is paid, plus fees.
This distinction is important because it allows MCA companies to get around many laws related to business loans. For instance, interest rate caps are in place to prevent business loans from being predatory (or “usurious”). However, due to the high factor rate and the short repayment timeline, the interest rate on an MCA can be 300% or more when expressed as an annual percentage. But it is not considered usurious because it’s not a loan.
Why does this all matter? In theory, if your revenue has fallen to the point that the business is no longer sustainable, the MCA provider should not be able to collect from you. They purchased your future receivables, but since you’re going out of business and no longer have cash flow, there is nothing to collect.
However, MCA agreements usually include provisions that make it possible to collect even if your business cannot repay the advance. They can also be enforced against the business owners personally. For example, you may be liable for the debt if you signed a personal guarantee. The agreement may also include a Confession of Judgment (COJ), which allows the MCA provider to file a lawsuit and secure a judgment without notifying you or allowing you to defend yourself in court.
An MCA Attorney Can Help
Dealing with MCA debt can be complex and confusing. Before closing your business, speak with a reputable attorney about the best exit strategy and how to handle an MCA and other business debt when winding down a business.
Going at it on your own is a hassle, confusing, and overwhelming. As a worst-case scenario, you could land yourself in legal trouble with lawsuits, judgments, and liens. Tayne Law Group has more than two decades of experience helping clients resolve MCA matters and other types of consumer and business debt.
Before you take steps to close down your business or stop paying on an MCA, talk to us about your options. We can review your situation and develop a plan that protects your credit, finances, and personal assets. We offer a free, no-obligation phone consultation. So call us today at (866) 890-7337 or fill out our short contact form. We never sell or share your information and will keep your matter confidential.
