Introduction
If you have taken out a merchant cash advance (MCA) to help fund your small business, you may be wondering what happens if you fall behind on payments or stop making them altogether. Unfortunately, failing to make MCA payments can result in serious consequences. In this article, we will break down what an MCA is, why stopping payments is problematic, and what exactly occurs legally and financially if you default.
Understanding Merchant Cash Advances
What is a Merchant Cash Advance?
A merchant cash advance provides small businesses with a lump sum of capital in exchange for a percentage of future credit card sales. It is not technically categorized as a loan, but rather as an investment in your business’s future revenue.
High Interest Rates and Quick Approval
MCAs carry very high effective interest rates, often between 70-200% APR when calculated as a loan – much higher than even most credit cards. However, they require no collateral and can be approved quickly based on a few months of credit/debit card sales history. This makes them appealing for businesses who cannot qualify for traditional financing.
Repayment Structure
The catch is that MCA companies take daily or weekly payments directly from your credit card receipts until the balance has been repaid in full. This means giving up a potentially large portion of your ongoing revenue. Falling behind can therefore impact your finances severely.
Consequences of Missed or Late MCA Payments
Escalating Repercussions
There are escalating repercussions for failing to make merchant cash advance payments on time:
1. Late Fees
An initial late payment will typically incur fees around $10 to $50 as a penalty. If lateness becomes a pattern, fees can quickly multiply to hundreds or thousands of dollars.
2. Higher Payment Deduction Percentage
MCA contracts allow the funder to increase the share of card receipts taken if payments become delinquent. Say you normally repay through 10% of volume – this could rise to 25% or more after defaults, drastically cutting into revenue.
3. Locked Out of Card Processing
MCA providers can contact your card processor directly to halt deposits and divert them towards paying off your balance. This freeze will impact your daily business operations and cash flow.
4. Debt Collection & Credit Damage
Defaulted balances will be handed over to collections agencies who can aggressively pursue payment. This also means your personal/business credit scores take a major hit.
5. Potential Lawsuit & Wage Garnishment
As a last resort, MCA companies may sue for breach of contract and secure legal judgments to seize your assets, garnish wages, put liens on property, etc. The financial impact snowballs.
Exploring Options if You Can No Longer Afford MCA Payments
1. Ask for Lower Deductions
Some funders may agree to temporarily reduce the percentage taken from daily card sales to ease cash flow issues. They prefer restructured payments over default.
2. Apply for Hardship Forbearance
Similarly, you may qualify for an official hardship pause on payments for 1-3 billing cycles. Interest continues accruing, but deductions halt.
3. Attempt Refinancing
If cash flow is very tight, refinancing through another MCA at lower rates may be possible to reduce burden. Compare terms carefully.
4. Negotiate Settlement for Pennies on Dollar
When seriously delinquent, funders often accept steep discounts on what you owe to recoup some losses. 40 cents on the dollar settlements are common.
5. File for Bankruptcy
Defaulting on an MCA balance alone typically won’t meet requirements for personal or business bankruptcy. But it can be discharged along with other debts.
6. Simply Stop Paying
Not advisable legally, but business owners do elect to walk away at times when MCA payments become unmanageable. Be prepared for consequences.
7. Consult Attorney
Speaking with legal counsel experienced with merchant cash advances can help navigate options like settlements, bankruptcy filings, and dealing with collection suits. They also review contracts for flaws.
Legal Implications of Defaulting on Merchant Cash Advances
MCA Agreements and Legal Treatment
Merchant cash advance agreements contain verbiage asserting that the funds advanced do not constitute a loan, but rather the purchase of future sales at a discount. However, legally speaking MCAs share many characteristics with loans and commercial financing.
Potential Legal Protections
So although the language attempts to skirt state lending and usury laws, courts often now treat merchant cash advances akin to loans. This means legal protections can come into play when providers seek to collect on defaults.
Various Legal Considerations
Each state also has specific laws regarding lending, debt collection, and consumer protection that come into play. An attorney familiar with MCA agreements can assess if any provisions were breached or rights violated.
Common Concerns Addressed
Can Merchant Cash Advances Put You in Jail?
A common fear among struggling business owners with overdue MCA balances is the threat of criminal penalties like arrests or jail time. However, defaulting on these kinds of financial agreements is treated as civil commercial matters rather than criminal violations.
Can They Really Access My Bank Accounts?
Another common question surrounding merchant cash advance defaults is whether funders can actually debit amounts owed directly from your bank account without consent. The answer is yes and no.
Avoiding Pitfalls and Seeking Help
Tips for Avoiding Potential Pitfalls
While certainly useful in a pinch, merchant cash advances ultimately provide expensive financing that eats into future business income substantially. Treat repayments seriously and have alternate options available if possible. Reach out for legal assistance navigating problems.
Finding Help for Merchant Cash Advance Issues
Here at Delancey Street, our attorneys have extensive experience assisting clients who have run into issues with their merchant cash advance agreements. We help negotiate settlements, pursue contract disputes, and provide alternatives to help protect your assets.
Specific Assistance Offered
Some specific ways we can help include contract review, negotiation of settlements, advice on bankruptcy filings, and assistance with defending against collection lawsuits and FDCPA violations.
Conclusion
The potential fallout from not paying merchant cash advances can be significant. But by acting swiftly and assertively, negative impacts may be mitigated. Consider the above options carefully before making decisions. And do not hesitate to call our legal team with any MCA questions.
