Direct answer
If you stop paying a merchant cash advance, the funder will usually treat the blocked or returned debit as a breach. Most contracts then let it declare a default: the whole remaining balance becomes due at once, fees are added, and the funder can pursue the business and anyone who signed a personal guaranty. What follows depends on your contract and your state. It can include notices to your card processor or customers under the funder's UCC lien, a lawsuit and, after a judgment, a freeze on your bank account. A drop in sales is different: many MCA contracts include a reconciliation clause that lets you ask for lower payments based on what you actually took in.
Key takeaways
- Lower sales alone usually aren't a default under a contract with a reconciliation clause.
- Blocking the ACH, switching bank accounts or taking another advance usually is.
- A default normally makes the whole remaining balance due, plus fees.
- Ask for reconciliation in writing, with bank statements, before you stop any payment.
Default is not the same as a slow month
An MCA is sold as a purchase of your future receivables, not as a loan. The daily or weekly payment is supposed to be an estimate of a fixed percentage of your sales, often called the specified percentage. If sales fall, a true MCA is meant to collect less, not demand the full balance.
That is why MCA contracts usually define default by what you do, not by how much you sell. Read the events of default in your own contract; the common ones are below.
- Stopping, blocking or reversing the funder's ACH debits.
- Changing or closing the bank account the funder debits without notice.
- Taking another advance when the contract prohibits it (stacking).
- Selling, closing or moving the business without telling the funder.
- Giving false information on the application.
What can happen after a default
The order and speed vary by funder and contract, but these are the usual steps. Keep a copy of everything you receive.
- Confessions of judgment: Some older contracts include a confession of judgment: a signed statement that lets the funder get a judgment without a full lawsuit. Since August 2019, New York only accepts them from people and businesses located in New York, which e...
Worked example: a reconciliation request instead of a missed payment
Say your contract buys 10% of your receivables. The funder set the daily debit at $364, based on $80,000 a month in expected sales over 22 business days. Sales fall to $50,000 a month.
10% of $50,000 is $5,000 a month, or about $227 per business day. A reconciliation request asks the funder to lower the debit from $364 to about $227, using your bank statements as proof. Contracts differ on how often you can ask and what you must send, so follow the clause exactly and keep the request in writing.
What to do before you miss a payment
- Read your contract's reconciliation, default, fee and guaranty sections.
- Add up every daily and weekly debit and compare it with expected deposits for the next 30 days.
- Ask for reconciliation in writing, with bank statements, before stopping any debit.
- Request a current payoff letter for each advance.
- Don't block debits or move accounts without advice; that is usually a default in itself.
- If you are served with a lawsuit, note the response deadline and talk to a lawyer licensed in that state.
- General information: This guide explains how MCA defaults commonly work. It is not legal advice, and the rules depend on your contract and your state.
Common questions
- Is it a default if my sales drop? Usually not by itself, if your contract has a reconciliation clause. The payment is meant to follow a percentage of your sales, so the remedy for lower sales is a reconciliation request. Stopping the debits on your own usually is a default.
- Can an MCA funder come after me personally? If you signed a personal guaranty, the funder can usually claim against you under it after a default. Read what your guaranty covers; some cover only breaches such as blocking debits or switching accounts.
- Is a merchant cash advance a loan? It is sold as a purchase of future receivables. Courts have treated some MCAs as loans when the funder carried no real risk, for example where there was no working reconciliation or a fixed repayment term. That can bring state usury limits into play, so it is worth raising with a lawyer if you are sued.