What Happens in a Merchant Cash Advance Breach of Contract

If you’ve received a default notice on a merchant cash advance (MCA), you’ve watched your account get frozen, or you’ve been served with a lawsuit, it may feel like the outcome is already decided. But the result isn’t set in stone. 

MCA agreements don’t always hold up in court, and funders can be just as guilty of breaching the contract as business owners. Before you consider refinancing or taking out another advance, have a legal professional review your agreement, explain each side’s obligations, and lay out your options.

What Counts as a Breach of Contract in a Merchant Cash Advance Agreement?

A breach of contract in an MCA occurs when either party fails to meet an obligation under the agreement. Some of the most common breaches that MCA companies allege include:

• Missed or blocked daily or weekly debits
• Switching payment processors without the funder’s permission
• Closing or selling the business without notice
• Opening a new business bank account to redirect receivables
• Giving inaccurate revenue figures on the application

A genuine drop in sales isn’t automatically a breach of contract. However, if your daily debits are calculated as a fixed dollar amount regardless of your actual revenue, it could result in a missed payment through no fault of your own. That’s why it’s so important to understand the funding company’s obligations under the agreement as much as your own.

Can the MCA Company Breach the Agreement Too?

Yes, and most business owners don’t realize it. MCA agreements run both ways, and either party can violate the terms. Common ways MCA funders breach contracts include:

• Refusing or ignoring a reconciliation request that’s allowed under the agreement
• Pulling more than the agreed percentage in daily or weekly debits
• Continuing to debit your account after the purchased amount has been collected
• Misapplying payments or failing to credit them to your balance

Reconciliation is often the primary way that MCA providers breach contracts. These agreements are structured as a purchase of future receivables rather than a fixed payment loan, meaning your payments should rise and fall with your sales. If you asked for a reconciliation and the funder ignored or outright refused your request, the refusal may be a breach of contract.

What Happens After an MCA Company Claims You Breached?

Once the funder claims you’ve breached the MCA contract, things tend to move quickly. Here’s what the next steps typically look like:

1. The full remaining balance may be demanded at once.
2. A UCC lien may be filed against the business assets.
3. Notices may go to your customers or payment processor.
4. The funder may invoke the personal guarantee you signed.
5. An MCA lawsuit may be filed, or an existing judgment may move forward.

Many MCA agreements, especially older ones, include confession of judgment language, which allows the funder to get a default judgment against you without going through the typical court process. Whether the clause is enforceable depends on the specific agreement and where it was signed, so it’s important to have an attorney review these agreements to determine the legality.

What Defenses Do You Have If You Are Accused of Breaching?

If you’re a business owner who has been accused of breaching your contract, there may be some defenses available to you. Depending on the specifics of your agreement, a few possible defenses may include:

• The advance functions as a disguised loan rather than a true purchase of future receivables.
• The MCA company took on no real risk.
• The company denied a legitimate reconciliation request.
• The MCA provider breached the contract first.
• The debit amounts were miscalculated, or the wrong percentage was taken out.
• The terms of the agreement are unclear or obviously one-sided.

An MCA isn’t a business loan, and it shouldn’t operate as one. Courts have recharacterized MCAs as traditional loans when the agreement didn’t treat them as true purchases of future receivables. An experienced MCA attorney can help you determine if this might be the case for you. Because each situation is different, there’s no guarantee that any of these defenses will succeed in your case.

What to Do First If You Are Facing an MCA Breach Claim

If you’re facing an MCA breach claim, it’s important to act quickly. Lawsuits often come with short deadlines to respond, and the sooner you act, the more options you’ll have. Here are the initial steps to follow:

1. Pull the full signed agreement. Thoroughly review your agreement, including every addendum and amendment.
2. Save bank and processor records. You want your own records of receipts, not just the funder’s version of events.
3. Put any reconciliation requests in writing. Maintain copies of any responses you receive (or don’t receive).
4. Stop signing anything new from the funder. Avoid agreeing to offers to restructure or refinance your existing balance.
5. Contact a debt relief attorney. Reach out before you respond to any demands or lawsuits, not after, so they have a chance to review everything.

How Tayne Law Group Can Help

Tayne Law Group helps many businesses that are struggling with their MCA agreement and aggressive providers. We have reviewed actual agreements, identified  whether a breach occurred on either side, negotiate settlements when possible, and defend business owners against collection lawsuits when an alternative resolution isn’t available.

If you’re facing a default notice or breach of contract, call (866) 890-7337 or fill out our short contact form to schedule a free phone consultation. We never share or sell your information, and all conversations are confidential.

Frequently Asked Questions

What counts as a breach of contract in a merchant cash advance agreement?

A breach of contract happens when either party fails to meet an obligation in the agreement, such as a business owner missing debits or a funder refusing a reconciliation request that’s allowed under the terms of the agreement.

Can I sue an MCA company for breach of contract?

It may be possible to sue an MCA company if it failed to meet its obligations under the agreement, such as ignoring a reconciliation request or collecting more than the contract allowed. Whether a lawsuit makes sense or is likely to succeed depends on the case.

What if my sales dropped and I could not make the daily payments?

A drop in sales isn’t automatically considered a breach of contract, but failing to make one of your agreed-upon payments could be one. What counts as a breach depends on how your agreement is structured and whether your payments are fixed or tied to your receivables.

Does a personal guarantee mean I am liable if my business breached the agreement?

Yes, personal guarantees often allow the MCA funder to pursue the business owner directly if the contract is breached. However, whether you’re actually liable depends on the guarantee’s specific language and whether a breach actually occurred.