What Happens If You Default on a Merchant Cash Advance?

Defaulting on a merchant cash advance (MCA) can result in aggressive collection actions, legal trouble, and significant financial strain for your business. In this guide, we’ll break down what happens when you can’t repay an MCA, including the legal, financial, and operational consequences. We’ll also explore your options if you're facing default and how to protect your business from long-term damage.

Understanding Merchant Cash Advances

A merchant cash advance is not a traditional loan. Instead, it's a financing agreement where a business receives a lump sum in exchange for a percentage of future sales, often repaid daily or weekly through automatic withdrawals.

Key characteristics include:

• No fixed repayment term – repayments fluctuate based on sales volume
  
• High factor rates – effective APRs can exceed 70–150%
  
• No collateral – but personal guarantees or confessions of judgment are often required
  
  

Because of these features, MCAs are fast but risky. When sales drop or cash flow tightens, many businesses struggle to keep up with daily debits—leading to default.

Signs You’re Headed Toward MCA Default

Catching the signs early can help prevent a full-blown default. Look out for:

• You’re skipping payroll or vendor payments to make daily MCA debits
  
• You’ve taken out new advances to repay old ones (MCA stacking)
  
• Your revenue has dropped below the break-even point for repayment
  
• You’ve received warnings or default notices from the funder
  

What Happens When You Default on an MCA?

Defaulting on a merchant cash advance can trigger a range of consequences. Here's a breakdown of the most common outcomes.

1. Daily Collection Calls and Emails

Missed payments will quickly result in a barrage of communication from your funder’s collections team. These are often daily, persistent, and stress-inducing.

2. Freezing of Your Business Bank Account

Many MCA agreements include ACH authorization and bank account access. If you block the funder’s withdrawals or cancel the account, they may:

• Contact your bank and request a freeze
  
• Attempt to debit alternative accounts (if listed in the contract)
  
• Use aggressive tactics to resume collections
  
  

3. UCC Liens and Credit Damage

Merchant cash advance providers file a UCC-1 lien against your business assets when funding the advance. If you default, the lien becomes actionable:

• It affects your ability to secure new financing
  
• Other lenders will view your business as high-risk
  
• Your business credit profile may take a hit
  
  

4. Confession of Judgment (COJ)

Some MCA contracts require the business owner to sign a confession of judgment, a legal document that waives your right to dispute a claim in court. Once you default:

• The funder can immediately file the COJ in court
  
• A judgment is entered without a trial
  
• The funder can seize bank funds or levy assets
  
  

New York and several other states have restricted COJs in recent years, but they are still used in various jurisdictions and can be enforced through legal loopholes.

5. Lawsuits and Court Judgments

If there’s no COJ, the funder may still sue you in civil court. Legal action can result in:

• Default judgments
  
• Garnishment of business revenue
  
• Seizure of assets (e.g., equipment, inventory)
  
  

6. Increased Debt Load and Stacking

To stay afloat, many business owners take out additional MCAs—known as "stacking"—which increases repayment pressure and makes default more likely. This cycle can spiral quickly.

Can You Go to Jail for Defaulting on an MCA?

No, merchant cash advance default is a civil matter, not a criminal one. You cannot be jailed for failing to repay an MCA. However, if fraud is involved (e.g., providing false bank statements), criminal charges could arise.

What to Do If You’re Facing Default

1. Review the MCA Agreement

Before doing anything, read your contract carefully. Look for:

• Confession of judgment clauses
  
• Personal guarantees
  
• Default triggers
  
• Remedies listed for non-payment
  

Understanding your rights and obligations is essential.

2. Negotiate with the Funders

Some MCA providers are open to modifying the payment schedule, especially if you’re upfront about cash flow problems. Ask about:

• Reduced payment plans
  
• Temporary pauses
  
• Buyout options from another funder
  

Document all communications in writing.

3. Work with an MCA Defense Attorney

If legal action is threatened—or has already begun—it’s wise to consult an attorney experienced in merchant cash advance defense. They may be able to:

• Challenge the validity of a confession of judgment
  
• Settle the debt for less than owed
  
• Stop harassing collection practices
  
• Buy you time through litigation or bankruptcy
  
  

4. Consider Business Debt Settlement

Debt settlement firms or legal teams can sometimes negotiate large reductions in the total amount owed. This is best done before a lawsuit is filed.

5. Explore Bankruptcy as a Last Resort

In extreme cases, Chapter 11 or Chapter 7 bankruptcy may discharge or restructure MCA debt. This should be a last resort, as it has long-term implications for your business.

How to Prevent MCA Default in the Future

• Avoid stacking MCAs or taking new advances to repay old ones
  
• Forecast your cash flow weekly to spot trouble early
  
• Use MCA funds wisely — avoid using them for recurring costs like rent or payroll
• Explore alternatives like SBA loans, business lines of credit, or invoice factoring
  
• Have a plan for MCA repayment before signing the agreement

Alternatives to Merchant Cash Advances

If you’re considering funding but want to avoid future headaches, here are some MCA alternatives: