What Happens to a Merchant Cash Advance If My Business Closes?

what happens to a merchant cash advance if my business closes

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 business for good. And if that’s the case, you might be wondering: “What happens to a merchant cash advance if my business closes?”

Closing a Business

About half of small businesses fail by their fifth year in business, according to the U.S. Small Business Administration. 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 officially dissolve this entity. That way you are no longer liable for business taxes or filings in your state. Dissolving your business also lets creditors know that 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 in order to form the partnership. Either way, it’s a good idea to officially file a dissolution. Again, this alerts creditors that you can no longer take on business debts. It’s particularly important for general partnerships, or 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 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 or MCA debts. Your lenders may want to know what your plan is 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. In some cases, 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 is different from a traditional business loan or line of credit. That’s because an MCA is not a loan at all. It’s actually an advance — the MCA provider is purchasing a portion of your future receivables and giving you the money upfront. The MCA company then deducts a percentage of your daily credit card transactions (or other revenue) over the course of 6-24 months until the advance is paid up, plus fees. 

This distinction is important because it allows MCA companies to get around a lot of laws related to business loans. For instance, there are interest rate caps 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 is unable to repay the advance, and can also be enforced against the business owners personally. For example, you may be personally 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 giving you the chance to defend yourself in court.

An MCA Attorney Can Help

Dealing with MCA debt can be complex and confusing. Before taking steps to close 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 at best 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, as well as other types of consumer and business debt. Before you take steps to close down your business or stop paying on a MCA, talk to us about your options. We can review your situation and come up with a plan that protects your credit, finances, and personal assets. We offer a free, no-obligation phone consultation. So give us a call today at (866) 890-7337 or fill out our short contact form. We never sell or share your information ever and will always keep your matter confidential.

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