A merchant cash advance (MCA) is an alternative lending tool that offers quick access to cash by allowing you to borrow against your business’s future revenue. These loans present risks to both your business and personal finances. Before applying for an MCA, it’s important to understand how personal guarantees work, how your personal assets may be at risk, and how to protect yourself and your finances.
Risks Merchant Cash Advances Pose to Personal Assets
You may already know that merchant cash advances pose some risks to your business. They’re often more expensive than traditional small business loans, thanks to their high factor rates (similar to the interest rate on a traditional loan). They can force you into a cycle of debt, similar to how a payday loan would for an individual borrower. However, MCAs also pose risks for your personal finances and could even result in you losing your personal assets.
Understanding Personal Guarantees in MCAs
MCAs and some other types of business financing often require personal guarantees. In other words, you agree to repay the loan if your business can’t.
Because of this personal guarantee, defaulting on an MCA can have similar ramifications to defaulting on any personal debts. The MCA company could pursue legal action to have your wages garnished or go after your personal assets, including checking, savings, and investment accounts.
There are two types of personal guarantees: unlimited and limited. Unlimited guarantees place you on the hook for 100% of your business’s unpaid loan balance if you default. A limited guarantee caps the amount you’ll have to repay if there are multiple owners. For example, if you own 25% of the company, your liability is 25% of the business debt.
What Personal Assets Are at Risk?
Defaulting on an MCA puts your business assets at risk, but it also puts your personal assets at risk. First, your financial accounts and income may be at risk. If the MCA funder decides to sue you, a judge may decide to garnish your wages or place a levy on your financial accounts to compensate the lender.
In addition to your financial accounts, your physical assets may also be at risk. For example, a judge may allow a merchant cash advance company to place a lien on your vehicle or real estate holdings until you’ve repaid the loan.
Real-Life Example: Personal Assets Lost to MCA Lawsuits
Let’s say you get a merchant cash advance for $100,000. You’re able to repay $25,000 of the debt, but then your business runs into some cash flow problems and you’re unable to keep up with your payments. Because you have no business assets to cover the remaining amount, the funder relies on your personal guarantee and comes after you personally for the debt.
You still owe $75,000 on your MCA. Depending on the circumstances, a judge may garnish, levy, or place liens on your personal assets, including your bank accounts, investments, and certain physical assets. Certain assets may be exempt, including personal items and your retirement accounts, and the list may be even longer depending on the state you live in.
How to Shield Your Personal Assets from MCA Lawsuits
If you’re considering a merchant cash advance for your business, it’s critical that you take steps to protect your personal assets from potential lawsuits.
Effective Strategies to Protect Personal Assets
If you’re considering an MCA or any other type of business financing, there are steps to take upfront to avoid putting your personal assets at risk:
- Choose the right business structure: Certain business structures protect your personal assets better than others. With a sole proprietorship, there’s no legal separation between you and your business. If someone sues you, they can go after your business assets. However, a limited liability company (LLC) creates a legal entity that’s separate from you as a person. If someone sues you, they can only go after your business assets.
- Avoid personal guarantees: When taking out business loans, try to avoid signing a personal guarantee. A personal guarantee opens the door for a lender to go after your personal assets, which you should avoid at all costs. However, some business financing like MCA’s require a personal guarantee, so it may be unavoidable.
- Shield your personal assets: If you can’t avoid a personal guarantee, you may take other steps to shield your personal assets. For example, you can title your assets in your spouse’s name only instead of your own. Additionally, you could create an irrevocable trust and place your assets in it. By doing this, you protect those assets from creditors.
Essential Legal Advice and Considerations
If you’re considering an MCA — or worse, if you already have one and are being sued or at risk of being sued — then it’s worth talking to an MCA expert and consulting an MCA attorney to learn how to best protect yourself. Business debt attorneys know the best ways to structure your business and personal assets to protect them from creditors. And if you’re already being sued, an MCA attorney or a debt relief attorney could help you navigate the legal process and best protect your assets.
Insurance Coverage Options for Small Business Owners
As a business owner, it’s worth exploring insurance to help protect your assets from lawsuits. The most common type of business insurance is general liability insurance, which protects you from third-party lawsuits. This type of insurance won’t shield your assets from creditors, especially if you’ve signed a personal guarantee, but it’ll protect you from other lawsuits.
When to Seek Professional Legal Assistance
There are various types of attorneys who can help you with your business and debt, including keeping your personal assets safe from business creditors. Consulting legal counsel early in the process can help you shield your assets, while consulting one later can help you defend your assets when you’re already facing a lawsuit.
Benefits of Consulting an Attorney Early
In many cases, the best time to protect your assets from creditors is before you’ve borrowed money in the first place. An experienced debt attorney can help you properly structure your business assets or set up proper shields — an irrevocable trust, for example — to protect your business from creditors.
How a Lawyer Can Help You Defend Your Personal Assets
If you’ve already entered into a merchant cash advance agreement and are either already being sued or are worried you might be, a MCA attorney can help defend your assets to minimize your losses.
First, if you can provide a counterclaim, you may avoid having to hand over any of your personal assets at all. For example, if your lender broke any laws or violated your loan contract, you may be able to have the lawsuit thrown out.
Even if you can’t have the lawsuit thrown out entirely, an MCA debt relief attorney can reduce the amount you have to pay by negotiating a settlement with the MCA lender. A settlement may allow you to pay less than you actually owe.
Conclusion: Securing Your Personal Assets Against MCA Claims
Taking out an MCA and signing a personal guarantee can be a risky move, but it may feel like the only option at times. If an MCA feels unavoidable, take steps upfront to secure your personal assets from your business liabilities, including choosing the right business structure and shielding your assets in a trust or another legal structure. And if you’ve already signed a personal guarantee, a debt relief attorney may be the best option.
Tayne Law Group has been helping business owners and other clients navigate their debt for over 20 years. Our team of experienced debt relief attorneys can help you navigate the MCA process, regardless of whether you’re just considering a loan or are already facing a lawsuit. Call (866)-890-7337 or fill out a short contact form to speak with a team member and determine if our services are right for you.
