What Happens If You Default on a Merchant Cash Advance?
A merchant cash advance default is set by your contract, not by one slow week. If sales drop and you ask for reconciliation, that usually isn't a default. If you block the debit, switch bank accounts or hide deposits, the funder can call the full balance due, add the contract's fees, enforce the personal guarantee and sue. What happens next depends on your contract and your state.
What counts as an MCA default?
Every advance contract has a section called events of default. It lists the things that let the funder treat the deal as broken. Read yours before anything else, because the list is different in every contract. These are the ones that show up most:
- You stop the debit, or tell your bank to block it, without the funder agreeing.
- You move your sales into a bank account the funder doesn't know about.
- You close or sell the business without the notice the contract asks for.
- You take another advance when the contract has an anti-stacking clause.
- Something on your application turns out to be false.
Notice what isn't on the list. A merchant cash advance is a purchase of future sales, so when sales fall, the payment is supposed to fall too. Courts look for that. New York's Appellate Division, in the case listed under Sources, weighed three things: whether the contract has a reconciliation provision, whether it has a set end date, and whether the funder can still collect if the business files bankruptcy. Lower sales plus a proper reconciliation request is how the contract is meant to work, not a default.
What can a funder do after a default?
The steps usually come in this order. Some funders skip ahead, and your contract and state law set the limits.
| Step | What it means for you | What you can still do |
|---|---|---|
| Default notice | The contract's default terms kick in. Many make the whole unpaid balance due at once and add a default fee. | Answer in writing. Ask what it would take to cure the default. |
| Personal guarantee | If you signed a personal guarantee, the funder can come after you, not just the business. | Have a lawyer read what the guarantee covers. Many only cover fraud or breach, not slow sales. |
| UCC lien notices | The funder's UCC filing lets it tell your customers or card processor to pay it directly. | Keep customers informed. Talk to a lawyer before you move accounts. |
| Lawsuit | The funder sues for the balance, fees and often its legal costs. | Respond by the deadline on the papers. A missed deadline can mean an automatic judgment. |
| Judgment and collection | With a court judgment, the funder can ask to levy bank accounts or garnish money owed to you. | Ask a lawyer about exemptions, settlement or a payment plan. |
A funder can't have you arrested for not paying. This is a civil contract. Criminal trouble comes only from fraud, like lying about the business. See can you go to jail for not paying an MCA.
What does a default cost in round numbers?
Say you took a $50,000 advance with a 1.40 factor rate. You agreed to deliver $70,000 of future sales. You've paid $30,000, so $40,000 is left. Sales just dropped by a third. Here's how three paths compare. The default fee is a stand-in: use the number in your own contract.
| Path | What you owe now | What happens to the payment | What it risks |
|---|---|---|---|
| Ask for reconciliation | $40,000, the same balance | Adjusts toward the agreed percentage of your lower sales | Nothing, if you send what the contract asks for |
| Ask the funder to restructure | $40,000, sometimes plus a fee | A smaller payment over more weeks | A fee, if the funder charges one; get it in writing |
| Stop paying | $40,000 due at once, plus a $2,500 default fee if the contract has one, plus legal costs | No payment, but the whole balance is due | Guarantee claims, lien notices, a lawsuit and a judgment |
The balance doesn't shrink on any path. What changes is how fast it's due and how much gets added. The first two keep the deal working. Use the payment calculator to see what the smaller payment would be.
What should you do before you miss a payment?
- Find the reconciliation and events-of-default sections in your contract and read them twice.
- Gather your last few months of bank statements. Funders want proof that sales fell.
- Send a written reconciliation request the way the contract says to. Keep a copy and the date you sent it.
- If sales won't come back soon, ask for a restructure in writing: a lower payment over a longer term.
- Don't block the debit, close the account or move deposits before you talk to a lawyer. Those are the classic triggers.
- Be careful with settlement companies that charge fees up front and tell you to stop paying. That's the path in the last row of the table.
- If you have more than one advance, see whether consolidation or reverse consolidation would make the weekly total fit.
Which state rules change the picture?
A few states limit what a funder can do. These are examples, not a full list.
- California: a confession of judgment can't be entered in a California court (Code of Civil Procedure § 1132). See California's MCA law.
- Texas: a confession of judgment in a sales-based financing contract is void, and automatic debits need a first-priority security interest in the account. See Texas's MCA law.
- Virginia: a confession of judgment in a sales-based financing contract can't be enforced. See Virginia's MCA law.
- Connecticut: the contract can't make you waive notice and a hearing before a prejudgment remedy. See Connecticut's MCA law.
This is general information, not legal advice. For your contract and your state, talk to a business lawyer.
Where does Afterfirst fit?
We're a broker, not a funder and not a debt settlement company. We don't collect, and we don't negotiate settlements. What we can do is look at your open advances and tell you honestly whether a consolidation or reverse consolidation would lower the weekly total. Sometimes the honest answer is that a reconciliation request is the better first step. Applying is free, and you never pay Afterfirst a fee. The funder pays our commission only if a deal funds, and the amount is in the offer paperwork before you sign.
Where do these facts come from?
- LG Funding, LLC v United Senior Properties of Olathe, LLC, 181 AD3d 664 (2d Dept)
- UCC § 9-406: notice to account debtors to pay the secured party (Cornell LII)
- California Code of Civil Procedure § 1132 (confession of judgment)
- Texas Finance Code, chapter 398 (commercial sales-based financing)
- Code of Virginia, title 6.2, chapter 22.1 (sales-based financing)
- Connecticut Department of Banking guidance and disclosure form, Conn. Gen. Stat. §§ 36a-861 to 36a-872
Behind on an advance, or about to be?
We can check whether consolidation or a reverse consolidation fits before anything gets worse. Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.