What Happens If You Don’t Pay a Merchant Cash Advance?
At DelanceyStreet, we focus on helping businesses that are overwhelmed with merchant cash advance debt. Often, business owners reach out because they needed a way out, and an MCA was the quickest option. Then, the daily or weekly withdrawals became overwhelming. Eventually, it was impossible to keep up with the debt. If you’re in that situation, here’s a detailed look at what happens if you don’t pay your MCA—and possible ways to address it.
Signs You’re Heading Toward Default
Many of our clients first realize they’re in trouble when they fall behind on their MCA payments, miss their minimums, or get late notices. If that sounds familiar, it’s likely you’re facing a persistent cash flow problem. Once you’re late, your MCA provider can trigger acceleration clauses, which means the entire balance is immediately due—plus added penalties.
Regardless, if you’ve received phone calls, notices of default, or seen big fees, then it’s time to look into a solution right away.
Potential Legal Consequences
If you don’t pay your merchant cash advance, here are some serious outcomes you might face:
- Confession of Judgment
Many MCA agreements include a confession of judgment clause, especially in states like New York. This means you’re effectively waiving your right to a standard legal process. If you default, the MCA provider can get a judgment against you very quickly, which can lead to frozen bank accounts or garnished funds—without much warning. - UCC Liens (Article 9)
Your MCA provider might have filed a UCC-1. This puts a lien on your business assets, including inventory, equipment, or receivables. If you fail to pay, the MCA provider may seize these assets, which can hamper your day-to-day operations. - Breach of Contract Lawsuits
While MCAs are structured as purchases of future receivables, many states treat them like loans when it comes to enforcement. Missing payments can result in breach of contract suits. A court order or judgment can harm your credit and hurt your relationship with other lenders. - Personal Guarantees
Some MCA agreements require personal guarantees, meaning your own assets or credit could be on the line. If the MCA provider comes after you personally, it can lead to deeper financial challenges.
Tax Implications If Debt Is Forgiven
If you end up negotiating a partial settlement, any forgiven amount might be considered taxable income by the IRS. You could receive a 1099-C, which means you’ll likely owe taxes on the forgiven portion. We always recommend speaking to a tax advisor if you reduce your MCA debt.
Tactics and Real-World Strategies
Below are common ways to address MCA default. Each strategy has pros and cons, and depends on your specific circumstances.
- Open Communication and Negotiation
Sometimes, creditors are open to adjusting terms or lowering daily payments. We believe that open communication is one of the best ways to get your creditors to listen. If you can prove your business is struggling by showing up-to-date financials—like P&L statements and balance sheets—they might be willing to renegotiate. - Formal Debt Settlement
DelanceyStreet focuses on helping business owners settle MCA debt for less than what’s owed. By negotiating directly with creditors, we often reduce principal amounts, lower interest rates, or extend repayment terms. This can be a strategic option, although forgiven debt may lead to tax consequences. - Checking for Unlawful or Usurious Terms
In some states, there are strict usury laws. If the effective interest rate is extremely high, there might be a legal argument that the MCA is unenforceable. However, this depends heavily on state law and the exact contract language. - Bankruptcy
Filing Chapter 7 or Chapter 11 is a big decision. Chapter 7 can eliminate many debts but may also force liquidation of business assets. Chapter 11 lets you restructure your debts while continuing operations. If you’re unsure, we recommend consulting an attorney. - Asset Liquidation
If you have non-essential assets—like extra equipment or real estate—selling them can generate immediate cash to settle or reduce your MCA debt. It’s not ideal, but it might prevent a more serious legal problem from unfolding. - Invoice Factoring
Sometimes, business owners factor their unpaid invoices to bring in quick funds. While factoring comes with a discount, the immediate cash flow can help you avoid going into default on the MCA.
Table: Key Approaches to Handling MCA Debt
| Strategy | What It Involves | Outcome |
|---|---|---|
| Open Communication | Reaching out to MCA provider; showing real financial data | Potentially lower payments, extended terms, fewer penalties |
| Formal Debt Settlement | Using DelanceyStreet to negotiate a reduced principal or interest | Possible balance reduction; can result in tax liabilities on forgiven amounts |
| Legal Challenges (Usury) | Arguing the MCA is a disguised high-interest loan | Varies by state; might invalidate parts of the MCA if proven usurious |
| Bankruptcy (Ch.7 or Ch.11) | Seeking legal protection from creditors | Can erase or restructure debt; major impact on credit and long-term operations |
| Asset Liquidation | Selling non-essential equipment or assets | Quick cash injection; may avoid further defaults but reduces operational capacity |
| Invoice Factoring | Selling accounts receivable at a discount | Immediate capital; reduces margin on sales but can avert immediate legal action |
Example Scenario
Imagine you own a small trucking company, and you took out multiple MCAs to cover fuel costs and unexpected repairs. Then, delays in client payments caused you to default. Your MCA provider filed a confession of judgment, freezing your bank accounts overnight. In that situation, you might:
- Provide updated financials to the MCA provider, showing that you only need a lower weekly payment.
- Liquidate a spare truck to cover part of the debt.
- Consult a legal team to see if you can argue the MCA’s terms are effectively usurious.
- Consider a structured plan via Chapter 11 bankruptcy if your debt load is beyond negotiation.
Conclusion
If you ignore MCA debt, you risk going out of business and possibly losing personal assets, especially if you have a personal guarantee. The key is to act early. Whether you try to adjust the terms directly with the MCA provider, explore a formal debt settlement, or even consider bankruptcy, there are options.
At DelanceyStreet, we focus on giving you a way to avoid going out of business. Our priority is to review your cash flow, your agreements, and help you figure out what makes sense for your situation.
Disclaimer: This information is not legal advice. Always consult a qualified professional.