Options if You Default on a Merchant Cash Advance

Taking out a merchant cash advance can provide much-needed working capital for a business. However, if you end up defaulting on the advance, it can spell trouble. Here’s an overview of merchant cash advances, why defaults happen, and most importantly – your options if you default.

What is a Merchant Cash Advance?
A merchant cash advance (MCA) provides a business with an upfront lump sum of capital in exchange for a percentage of future credit card sales. It is not technically a loan, since there is no set repayment schedule. Instead, the provider takes a fixed percentage of daily credit card sales until the full amount plus a factor rate is repaid.

MCAs are popular with businesses because approvals happen quickly and repayments adjust based on sales volume. However, the costs are often higher than traditional small business loans. Factor rates typically range from 1.1 to 2.0 – meaning you’ll repay 110-200% of the amount advanced.

Why Do Defaults Happen?
There are a few common reasons businesses default on their merchant cash advances:

  • Sales volumes dropped unexpectedly, so the business cannot afford the fixed daily repayment anymore
  • The business misunderstood or underestimated the total repayment amount due
  • Poor financial management meant the business relied too heavily on the MCA funds rather than balancing with other capital
  • An unexpected expense or event left the business without enough working capital to support daily operations and MCA payments

Regardless of the reason, defaulting can leave a business owner feeling scared and overwhelmed. But you do have options to resolve the situation.

Option 1: Renegotiate Terms
If your business has experienced a temporary setback, but you expect sales to recover, then renegotiating may help. Contact your MCA provider, explain your situation, and request an adjustment to your factor rate or repayment structure.
For example, you could ask for a lower percentage of daily credit card sales. Or request a repayment holiday until you’re back on your feet. Then restart repayments at a higher percentage to catch back up.
Most MCA providers want to help businesses succeed, so they may agree to adjusted terms rather than losing out completely. Be prepared to share financial statements to back up your situation.

Option 2: Refinance with Another MCA
If your original MCA provider won’t negotiate, refinancing the balance with another company is an option. This gets you a fresh influx of capital to restart operations, while consolidating what you owe into a new agreement.
When refinancing merchant cash advances:

  • Shop around for the best rates and terms
  • Be transparent about your situation so new providers understand the risk
  • Avoid offers that seem “too good to be true” with super low rates
  • Create a realistic repayment plan based on expected sales volumes

Refinancing with longer repayment terms reduces your daily repayment amount. But the total repayment cost may increase due to a higher factor rate. Still, it’s one way to avoid default if you can qualify.

Option 3: Seek Legal Protection from Creditors
If refinancing or renegotiating won’t work, legal options like bankruptcy or assignment for the benefit of creditors (ABC) could help shield you from collections.

Here is an overview of how these options work:

Chapter 7 or Chapter 11 Bankruptcy
Filing for bankruptcy stops collections activity while a repayment plan is negotiated or debts are discharged. Chapter 7 bankruptcy liquidates assets to pay creditors, while Chapter 11 restructures debts so you can keep operating the business.

  • Pause collections while you reorganize your finances
  • Negotiate lower payoff amounts
  • Discharge qualifying business debts entirely


  • Damages business credit for years
  • Legal fees and court costs
  • Risk losing assets

Assignment for the Benefit of Creditors
ABC is an alternative to formal bankruptcy. You assign your assets to a third party liquidating agent, who then pays creditors. Any debts remaining after assets are sold are discharged.


  • Usually less expensive than bankruptcy
  • Faster process with fewer court filings
  • Discharge leftover debts


  • Less restructuring options – assets still get liquidated
  • Less protection if creditors file lawsuits

If considering bankruptcy or ABC, speaking with a business attorney is highly recommended to understand your rights and options fully.

Option 4: Attempt Debt Settlement
Debt settlement involves negotiating directly with creditors to pay a lump sum that is less than the full balance owed. This avoids legal routes that damage your credit and business reputation.
Typical debt settlement steps include:

  1. Stop making payments so you can save up settlement funds
  2. Open a dedicated savings account and deposit regular amounts
  3. Hire a debt settlement firm to negotiate on your behalf
  4. Offer creditors a lump sum payment of 30-50% of balances
  5. Get remaining debt forgiven

This can be an affordable path for sole proprietors and very small businesses. But it only works if you have unsecured debts and access to lump sum funds from owners’ personal savings or friends/family.

What Happens if You Keep Ignoring Default?
Some business owners simply ignore calls and letters from their MCA provider after defaulting. But sticking your head in the sand is NOT advisable.

Here is what could happen if you keep ignoring a merchant cash advance default:

  • Late fees and higher interest rates kick in, raising your balance
  • The MCA provider sues you personally for the debt
  • A court judgment is issued allowing bank account levies, wage garnishment or property liens to collect
  • Your personal credit score is damaged, jeopardizing future financing
  • Legal costs pile up on top of what you already owe

Essentially, ignoring a merchant cash advance default gives providers full legal rights to pursue repayment aggressively. Acting quickly gives you more control over the outcome.
Don’t Be Afraid to Ask for Help
Handling a merchant cash advance default can feel overwhelming for business owners. But support is available if you know where to turn.
Here are some options to ask for assistance:

  • Contact a nonprofit small business mentor for objective advice
  • Hire a business attorney to understand your legal position
  • Work with an accountant to analyze your financial situation
  • Use a debt relief service to negotiate settlements for you
  • Join a small business owners’ support group to learn from others

And remember – thousands of business owners have navigated defaults and still gone on to succeed. So while the situation seems dire now, you can get through this by making a plan and asking for help. The key is being proactive, rather than hiding from the problem.

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