When Is Stopping MCA Payments Considered Defaulting?
Merchant cash advances (MCAs) can provide quick access to capital for small businesses. However, they also come with high costs and strict repayment terms that can be difficult to meet. Failure to make payments as agreed can have serious consequences like being declared in default. So when does stopping MCA payments lead to default?
What Happens When You Default on an MCA?
Default occurs when a borrower fails to make payments as required under the MCA agreement. Common events of default include:
- Missing one or more consecutive daily payments
- Having insufficient funds in the linked bank account for withdrawals
- Closing the bank account or changing processors without lender approval
- Declaring bankruptcy or insolvency
Upon default, the MCA lender can take various actions like:
- Freezing the business bank account
- Confessing judgment to seize assets
- Sending the account to collections
- Damaging the business’ credit rating
Clearly, defaulting on an MCA can create big problems. Business owners should understand what causes a default and how to avoid it if possible.
When Are Missed Payments Considered a Default?
For MCA loans, even a single missed payment can potentially trigger a default. Most agreements require fixed daily debits from the borrower’s bank account. If there are insufficient funds on any given day, the lender may declare a default.However, note that:
- Not all lenders take such drastic action after one missed payment
- There may be a short grace period before payments are considered late
- The merchant can sometimes negotiate alternate arrangements
Much depends on the specific lender and the history of the account. Established borrowers in good standing are less likely to face immediate default compared to higher-risk merchants.
What to Do If You Miss an MCA Payment
If you realize you will not be able to make an upcoming MCA payment, take proactive steps:
- Contact the lender immediately – Explain the situation and ask about options before any payments are missed if possible.
- Negotiate revised terms – See if the lender can pause or lower payments temporarily to avoid default.
- Explore refinancing – Getting a lower-cost loan to pay off the MCA may be better than defaulting.
- Try to catch up – If possible, deposit funds to cover missed payments and late fees to restore good standing.
While options are limited after missed payments, clear communication and good faith efforts demonstrate willingness to repay. This makes lenders more likely to work with the business rather than immediately declaring default.
Common Situations That Lead to Stopped MCA Payments
Some scenarios that can prevent merchants from making payments include:
1. Temporary Business Disruptions
Incidents like natural disasters, supply chain issues, or a key employee leaving can severely impact cash flows for a period. But the MCA repayment schedule continues irrespective. The fixed payments may be unaffordable until business operations normalize.
2. Seasonal Revenue Drops
For seasonal retail businesses, revenues dip during slower periods. Summer may be weak for a ski shop or December for a lawn care provider. MCA payments based on past healthier months can overburden the merchant during seasonal lows.
3. Poor Underwriting
Some MCA providers focus more on quick disbursal than proper underwriting. They may fund merchants without considering recurring slow periods or major ongoing financial obligations. This makes maintaining payments difficult despite best intentions.
4. Poaching from Other MCAs
A practice called “stacking” involves taking out a new MCA to pay off an existing one. This worsens the repayment burden and often leads to defaults down the line. Unscrupulous lenders allow and even encourage stacking to poach clients despite the risks.
Options to Avoid Defaulting on MCA Payments
Business owners should research options to avoid interrupted payments and default if possible:
- Work with the MCA provider – Openly communicate issues and negotiate alternate arrangements in good faith.
- Explore debt consolidation – Take a lower-cost business loan to pay off the MCA and consolidate debts.
- Consider business finance training – Learn to better manage cash flows and handle debts.
- Improve business practices – Boost revenues so you can comfortably afford payments.
While stopping payments is extremely risky, default may be avoided by early intervention. Being proactive is key even if you miss a payment due to circumstances beyond your control.
What to Do If You Receive a Default Notice on Your MCA
If you get a default notice from the MCA provider, stay calm. Then take the following recommended steps:
- Stop further transactions – Temporarily stop accepting new card payments to prevent withdrawals.
- Consult an attorney – Understand your obligations and defenses before responding.
- Reply to the notice – Acknowledge receipt and convey willingness to resolve matters.
- Attempt negotiation – Restructuring agreements may still be possible before legal action begins.
- Prepare your defenses – Gather evidence on reasons for non-payment and highlight good faith efforts.
- Be ready to file bankruptcy – Default may leave business owners with no option but to declare bankruptcy.
Though the situation seems dire, businesses can still negotiate, rehabilitate the debt, or file for bankruptcy if discussions fail. So don‘t panic and handle things methodically.
How an Experienced Attorney Can Help if You Default on an MCA
Small business attorneys regularly help owners refinance or contest MCA debts. An experienced lawyer can guide you on options like:
- Negotiating alternate repayment terms
- Contesting flaws in the original agreement
- Filing for bankruptcy if viable solutions don’t work out
- Defending against collection lawsuits
- Rehabilitating bad credit once debts are settled
Key Takeaways – When Is Stopping MCA Payments Considered Defaulting
- MCA agreements allow lenders to declare default even after one missed payment
- However, established borrowers may get some leeway or grace period
- Act quickly if you will miss payments to avoid immediate default
- Inform your provider, negotiate revised terms, or refinance debts
- Defaults can still be contested or settled with credit rehabilitation
- Experienced small business lawyers can help negotiate and defend
Businesses should research all options before concluding that defaulting on an MCA is unavoidable. And even post-default, experienced attorneys may find solutions to resolve debts under manageable terms.
