What Happens If You Default on a Merchant Cash Advance

Default on a merchant cash advance does not work like missing a loan payment. There is no 30-day grace, no standard cure period, and the funder frequently has legal tools ready before you know anything is wrong. Here is the usual sequence.

Day one: the debit bounces

Most contracts define default broadly — a bounced ACH, a change of bank account, a drop in deposits, even taking another advance without permission. Many treat a single failed debit as an event of default on its own.

Expect calls within hours, and expect the funder to re-present the debit, which can trigger a second NSF fee from your bank.

Week one: acceleration and the personal guarantee

Funders typically accelerate — the entire remaining purchased amount becomes due at once. If your contract includes a personal guarantee (most do, at minimum a guarantee of performance), the funder can pursue you personally, not just the business.

Weeks one to four: UCC enforcement

The UCC-1 your funder filed at closing gives them a claim on business assets — receivables, equipment, inventory. They can also send notices to your payment processor or customers instructing them to pay the funder directly. That is the step that damages relationships fastest. See what a UCC-1 filing actually does.

The confession of judgment, where it still works

If your contract contains a confession of judgment, the funder may be able to obtain a judgment without a hearing and use it to levy your bank account. New York closed this route for out-of-state businesses in 2019 and other states have restricted it, but the clause is still in circulation. Check your contract for it now, not after a default. See the confession of judgment guide.

What to do first

• Do not move money out of the business account to hide it. That turns a contract dispute into a fraud allegation.
• Request reconciliation in writing if your contract allows it, before you miss a payment.
• Call the funder before the debit fails. A negotiated restructure is far cheaper than an enforced default.
• Get a lawyer who has handled MCA matters. This is a specialty and general business counsel often misses the clauses.
• Read your contract for the arbitration clause — some name arbitration services with records worth knowing about.

If you are not sure what your contract allows the funder to do, upload it to Gradino's free Contract Check. It flags the personal guarantee, confession of judgment, reconciliation and default language in about a minute.

Common questions

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