Quick Summary
If you signed a personal guarantee, MCA lenders can pursue your personal assets. It’s important to be familiar with the details of your contract and understand your legal options.
Introduction
Merchant cash advance (MCA) agreements often include personal guarantees, which are clauses that make you personally responsible for the debt if your business can’t repay it. When they’re triggered, they allow lenders to pursue your personal bank accounts, wages, and other assets upon default.
Far too many small businesses overlook these clauses when signing their MCA paperwork, as they’re often buried in complicated legal language. It’s not until their business is in trouble that they realize what they personally put at risk.
If you’re thinking of taking out an MCA, it’s essential to understand the legal consequences. Keep reading to learn more about how personal guarantees work, what’s at risk, and what to do to protect yourself.
What Is a Personal Guarantee and When Does It Get Triggered?
A personal guarantee is a provision in many MCA contracts that makes you, as an individual, legally responsible for your business’s MCA debt. Once it’s triggered, it allows your lender to come after you directly for your personal assets to satisfy the debt you didn’t pay.
MCA personal guarantees are often triggered when a business misses payments, defaults on a debt, closes its doors, or files for bankruptcy.
Many MCA contracts include unlimited guarantees, which expose all of your personal assets. A limited guarantee, on the other hand, limits your personal liability to a certain amount. Make sure to read your MCA agreement to see what kind of liability you’re signing over.
What Personal Assets Are at Risk?
Once a personal guarantee is triggered, nearly all of your personal assets could be targeted, depending on the terms of your MCA contract. Assets they may come after include:
- Bank accounts including joining with spouses and family members
- Wages
- Home equity (depending on state exemptions)
- Vehicles and other personal property
- Investment accounts
MCA companies often move quickly and use aggressive collection tactics, which can come as a shock to business owners. Many MCAs also include a confession of judgment (COJ), which allows the MCA company to get a judgment against you and seize your assets immediately, without going through the traditional court process.
Because of the personal guarantee, your personal credit score can also suffer if your MCA provider reports your delinquent debt or obtains a judgment against you.
Can You Challenge a Personal Guarantee?
Yes, many personal guarantees can be challenged when contracts include predatory terms or simply violate the law altogether. Here are some situations where you may be able to challenge your MCA and either minimize or eliminate your personal liability:
- The MCA provider violated the contract terms or increased your payments without authorization.
- The contract included predatory or unconscionable terms or charged interest rates above legal limits.
- The contract included an illegal confession of judgment (such as one from an out-of-state borrower, which is banned in New York).
- The lender used improper enforcement tactics.
- The lender falsely claimed you defaulted on the debt and provided no reconciliation.
If any of these apply to your situation, an MCA attorney may be able to help. An experienced MCA attorney can help negotiate a settlement of your MCA debt or help protect your personal assets which could include the release of your personal liability.
How Tayne Law Group Protects You From Personal Liability
Tayne Law Group works with many business owners to review their MCA contracts and protect their personal assets. As a client you can be sure that our team will review your agreement to look for any predatory or illegal provisions. If we find anything illegal, either in your contract or in your lender’s actions, we can offer a strategy to challenge the enforceability of your personal guarantee and the contract itself.
Even if we can’t limit your personal liability, we can still may be able to help you negotiate a settlement with your MCA lender, protect exempt assets under state law, or defend you against lawsuits and asset seizures, if it comes to that.
To learn if Tayne Law Group is the right partner for you, contact us today by calling (866) 890-7337 or filling out our short contact form to set up a consultation. We never share or sell your information, and all conversations are confidential.
Key Takeaways
- A personal guarantee gives an MCA lender the right to pursue your personal assets if your business can’t repay the debt.
- Many business owners sign MCA contracts without understanding the personal guarantee, which can lead to unwelcome surprises later.
- Once personal guarantees are triggered, they allow lenders to freeze bank accounts, garnish wages, or seize other property.
- Personal guarantees can be challenged in some cases, and an MCA attorney can help you understand your options.
FAQs
What is a personal guarantee in a merchant cash advance?
A personal guarantee is a clause in a merchant cash advance where you personally promise to repay the debt if your business can’t, making your personal assets liable.
How can I tell if my MCA contract includes a personal guarantee?
To learn if your MCA contract includes a personal guarantee, carefully read the contract and look for sections that include terms like “personal guarantee,” “personal guaranty,” “guarantor,” or “individual liability,” or signature lines that require you to sign for both the business and personally.
What happens to my personal assets if I default on an MCA with a personal guarantee?
If you default on your merchant cash advance, your funder can pursue your personal bank accounts, wages, and property to recover the unpaid balance. The confession of judgment that many MCA contracts include often allows them to get a default judgment against you.
Can I negotiate or limit a personal guarantee before signing?
You can try to negotiate a capped guarantee amount before signing your merchant cash advance contract. You can also add carve-outs or request that the guarantee be eliminated after a certain number of on-time payments.
What happens if you don’t pay back a merchant cash advance?
If you default on your merchant cash advance, your lender could use aggressive collection tactics, take legal action against you, and potentially seize your personal assets, per the terms of your contract’s personal guarantee.
