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Options if You Default on a Merchant Cash Advance

Our website at Delancey Street provides debt relief services to small business owners struggling with business debt. If you have defaulted on a merchant cash advance (MCA), we may be able to help restructure and settle your debt.As a quick overview, a merchant cash advance is a form of business financing where a lender provides a lump sum of capital in exchange for a percentage of future credit card sales. The terms are specified in the MCA agreement, with repayment automatically deducted from daily credit card batches.

Common Causes of MCA Default

There are a few common reasons why a business may default on their merchant cash advance:

• Lower than expected sales resulting in insufficient funds to cover the fixed daily repayment
• Taking out multiple MCAs that collectively have unaffordable repayment terms
• Experiencing a slow season or economic downturn that severely impacts cash flow
• Poor budgeting and inability to accurately predict future business performance

Consequences of Defaulting

Unfortunately, defaulting on an MCA can spiral into serious financial and legal consequences:

• Daily payments rapidly accumulate penalties and interest causing the balance to balloon
• MCA lenders can freeze bank accounts, garnish wages, and aggressively pursue collection
• Additional MCA funding options are cut off due to damaged credit
• Downward pressure on cash flow makes it harder to catch up

Without a lifeline, many businesses end up closing their doors under the weight of crippling MCA debt.

4 Options to Resolve an MCA Default

If you have defaulted, don‘t panic. You still have options to resolve your situation. Here are 4 common routes that business owners take:

1. Loan Consolidation

Taking out a business loan or line of credit to pay off the full MCA balance in one lump sum is the fastest option. Benefits include:

• Immediately stops daily payments and penalties
• Frees up cash flow going forward
• Allows you to pay down debt on more affordable long term terms

The main challenge is securing financing when your business is already in distress. Make sure to shop rates from multiple small business lenders.

2. Debt Settlement

Hiring a professional debt settlement firm like Delancey Street to negotiate discounted payoffs with your MCA lenders can eliminate 20% to 50% off your balance. Key things to know:

• Most MCA lenders will negotiate to avoid long legal battles
• Our debt experts handle all talks so you can focus on your business
• Settlements release you from further collection efforts or lawsuits
• Having a lower lump sum helps make repayment achievable

3. Debt Restructuring

Working with a credit counselor to systematically restructure your obligations into a consolidated payment plan is less intense than settling for pennies on the dollar. You get:

• One predictable monthly payment
• Lower interest rates on restructured debt
• Protections from legal actions during the program
• Time to improve cash flow and operate debt-free

This route keeps accounts current but takes years to fully repay.

4. Bankruptcy

Filing business bankruptcy is the last resort but winds down or reorganizes your company to eliminate debt entirely. Key notes on the process:

• Chapter 7 bankruptcy liquidates your business assets to pay creditors
• Chapter 11 attempts reorganization instead through a court-approved repayment plan
• Having an attorney helps navigate what assets you can protect
• Be prepared to close unprofitable business units

Bankruptcy leaves a long term stain on your commercial credit. Weigh this carefully before choosing this most drastic measure.

How We Can Help

(212) 210-1851

If you have defaulted on a merchant cash advance, Delancey Street has experts that can review your situation and debt accounts to determine the most strategic path forward. We will represent your best interests in all negotiations and legal proceedings.

Know Your Rights in Debt Collection

Even during turbulent financial times, business owners still have certain rights and protections from overly aggressive collection attempts by MCA lenders:

Fair Debt Collection Practices Act

This federal law prohibits deceptive, dishonest, and abusive debt collection tactics. Examples include:

• Threatening violence or criminal charges that cannot be enforced
• Contacting third parties about your debt without consent
• Misrepresenting the legal status of a debt
• Simulating a law firm’s identity to intimidate

Under the FDCPA, you can send formal written notice to cease communication and file official complaints for violations.{{< notice “tip” >}}
Get help responding to unlawful collection practices from an experienced business attorney or debt relief agency. Never ignore serious threats or lawsuits.
{{< /notice >}}

Statute of Limitations

Even legitimate debts have a statute of limitations on how long they can be pursued in court for repayment. Time frames vary by state but are often between 3 to 6 years.

• The clock starts when you default and stops if sued
• Making a partial payment can reset the limitations period
• Expired debt is still owed but becomes unenforceable in court
• Collectors may still attempt contact but have no legal standing

Check your state laws to see if your MCA default now falls outside the enforceable window. This can expand settlement negotiation options.

How to Prevent MCA Default

Taking some preventative steps when first securing merchant cash advance funding can help avoid future distress:

• Shop multiple offers – Compare rates and terms to find the most affordable option. Avoid brokers that tack on fees.
• Review contract details – Scrutinize the payback percentage, payment frequency, total repayment costs, and breach clauses before signing.

• Conduct a ROI analysis – Make sure the lump sum injection generates enough incremental profit to service the fixed payments.
• Have a lawyer review – An attorney can catch predatory terms and advise if certain provisions are enforceable.
• Only use what you need – Don’t take the maximum amounts offered if it stretches your bandwidth.

• Separate business & personal assets – Make sure business obligations can’t put your personal finances at risk.

Alternative Financing to Explore

Once you get back on steady footing, you may still need working capital financing. Merchant cash advances are not your only option. We recommend exploring:

• SBA Loans
• Business Credit Cards
• Business Lines of Credit
• Invoice Factoring
• Equipment Financing
• 401(k) Business Financing

These tend to have lower costs, more flexibility, and better protections should you undergo periods of hardship. With proper planning, they enable sustainable growth without the risk of predatory lending.