Defaulting on a Merchant Cash AdvanceDefaulting on an MCA
Oh Boy! Maybe business was bad and closing your doors was the only solution. Or maybe you couldn’t afford to give up a percentage of your credit card sales anymore so you did something to prevent that. Either way you’ve found yourself in default on a Merchant Cash Advance. What happens now?
Merchant Cash Advances were originally intended to be a true unsecured method of financing without a personal guarantee. In case of default, the funding provider did not have the safety of collateral or the ability to pursue you personally for the funds. That was how the product was designed. As the industry grew, some new firms have stretched their contract language to erase those benefits. Hopefully you read your contract and are aware of the potential recourse.
There are two ways to default:
- Business becomes insolvent and is forced to close ( the safest default )
- You interfere with the flow of credit card sales to the funding provider, whether because of hardship or malicious intent (YOU DON’T WANT TO DO THIS!)
A strict Merchant Cash Advance firm may pursue you if your business fails and closes. For the most part, they will have little means to collect. This can’t show up as a default or late payment on your credit report because the funding firm is technically not a creditor. If your contract was a true purchase of future sales, the deal is done because there are no more sales to be generated. If your contract language includes a personal guarantee, you stand a good chance that this can not be enforced. If your business closes and you are harassed by a funding firm to pay up, you should consult with an attorney.
Every Merchant Cash Advance company will pursue you if you breach your contract or interfere with the normal flow of credit cards sales. A breach of contract opens up the war chest for recourse. Do not breach your contract! If you find yourself facing hardship or can no longer sustain the funding firm’s withholding percentage, you should immediately contact the funding firm for assistance. Since they have just as much interest in your business succeeding, there is a good chance they will negotiate a plan to resolve the problem. Most firms will also consider the following to be a breach of contract:
- Moving to a new location
- Using a merchant service provider other than the one both of you agreed you would use for the duration of the program
- Offering a discount to a customer to use a means of a payment other than credit card
- No longer accepting credit cards
- Using an additional merchant service provider where a portion of the credit card sales does not flow to the funding firm
- Selling the business
- Closing the business for periods of time the funding firm was not aware of
- Dissolving the legal entity or transferring the legal entity of which the business is held
- Obtaining a business loan
If any of things are unavoidable, you must inform the funding firm first. Certain things are allowable so long as notification is given (such as moving, obtaining a business loan, or closing the store for vacation, maintenance, repair, etc). A legitimate breach of contract will result in calls from collection agents and very often a lawsuit. Most of these firms are sufficiently capitalized to pursue even the smallest of claims and they usually win in court. This will result in a judgment on your credit report. At the very least, you will be unable to obtain a Merchant Cash Advance in the future from any firm. Industry groups have created blacklists to track bad clients. Read more about this here.
Do not breach your contract. Contact your funding provider if there is a problem or impending change to the way you conduct business. If your issue falls on deaf ears, consult with an attorney.