What Happens if You Default on a Merchant Cash Advance?

A merchant cash advance (MCA) offers several great benefits, making it one of the most popular financing options among small business owners. In MCA, you get an advance for your business with no collateral and no restriction on how to spend the cash. You’ll then make repayments from your future revenue and credit card sales until the obligation is duly fulfilled.

Sounds simple enough, right? That’s because it actually is. Where it can start to get complicated, however, is when the MCA recipient defaults on payments as agreed when signing the contract.

The actual consequences of defaulting on a merchant cash advance will depend on a number of factors, including the amount of money left to be paid and the terms of the agreement. Plus, MCAs are not considered loans so they are not subject to the laws that generally apply to other kinds of business loans. Here’s a few things that can happen:

Fiscal penalties enforced

In the beginning, missing payments on your MCA or paying it late will usually result in fiscal penalties in the form of various fees and higher interest rates. The details of these penalties will be disclosed upfront in the contract, so you know what you’re getting into. Merchant cash advances are typically unsecured so they may have higher penalties for late payments and defaults. If these additional charges are not cleared on time, the total cost of a loan can keep rising over the delinquency period and the business owner may find that they now owe way more than was originally required to close out the contract.

Credit implications

Defaulting on any loan payment will impact your credit score and an MCA is no different. Some lenders can allow a grace period ranging from a few days to a few weeks, but eventually credit bureaus will receive information about the default and your credit score will be affected. As you can imagine, having a lower credit score and having a “bad debt” in your credit report can lead to difficulties in securing funding in the future. Those who are able to do so may have to deal with higher interest rates.

Legal action

A merchant cash advance is a contractual agreement and defaulting on the payments can constitute a contract breach. This means the MCA company can issue a lawsuit, especially if the debt is quite large. The courts will then determine if the business owner is legally obligated to complete the repayments and if so, can order the liquidation of a business asset in order to fulfill the obligation.

Asset repossession

While merchant cash advances are generally an unsecured business financing option, some lenders may require a tangible asset to be used as collateral, in addition to drawing against future revenues. If you secured your MCA with an asset, it can be repossessed in the event of a default.

Debt collectors hounding you

If it starts to look less likely that the lender will not receive your loan repayments as agreed, they can try to recover the funds through collections agents.

What you can do instead of defaulting on your MCA

If you have trouble repaying your merchant cash advance, you can always try to renegotiate your payment terms with the lender. Alternatively, you may be able to take out another loan with smaller payments and a longer term to refinance the debt. These are much better options compared to defaulting and going through any of the scenarios listed above.

Bottom Line

Defaulting in paying your MCA can impact your business severely. Only borrow when you are sure you will be able to pay.