What happens when you default on a merchant cash advance?

What happens when you default on a merchant cash advance?

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Introduction

Defaulting on a merchant cash advance can have serious consequences for businesses. A merchant cash advance is a type of financing where a business receives a lump sum of cash in exchange for a percentage of its future sales. While this type of funding can provide quick access to capital, failing to meet the repayment terms can lead to a range of negative outcomes. In this article, we will explore what happens when a business defaults on a merchant cash advance and the potential ramifications it can have.

Legal actions: When a business defaults on a merchant cash advance, the lender may take legal action to recover the outstanding amount. This can involve filing a lawsuit against the business, seeking a judgment, and potentially obtaining a court order to collect the debt.

Collections: In addition to legal actions, lenders may also engage in collection efforts to recover the defaulted amount. This can include contacting the business directly, hiring a collection agency, or selling the debt to a third-party debt collector. These collection efforts can be persistent and may involve frequent phone calls, letters, and other methods of communication.

Damage to Credit Score

Credit reporting: Defaulting on a merchant cash advance can have a significant impact on a business’s credit score. Lenders typically report delinquent accounts to credit bureaus, which can result in a negative entry on the business’s credit report. This negative information can stay on the credit report for several years, making it difficult for the business to obtain future financing or credit.

Difficulty obtaining future financing: A damaged credit score can make it challenging for a business to secure financing in the future. Lenders may view the default as a sign of financial instability and be hesitant to extend credit to the business. This can limit the business’s options for growth and expansion.

Seizure of Assets

Collateral: In some cases, a merchant cash advance may be secured by collateral, such as business equipment or inventory. If the business defaults on the advance, the lender may have the right to seize these assets to recover the outstanding debt. This can have a significant impact on the business’s operations and ability to generate revenue.

Personal guarantees: In certain situations, lenders may require a personal guarantee from the business owner or other individuals associated with the business. This means that if the business defaults, the lender can pursue the personal assets of the guarantor to satisfy the debt. This can include personal bank accounts, real estate, or other valuable assets.

Legal consequences: Defaulting on a merchant cash advance can result in legal consequences beyond the initial collection efforts. If the lender obtains a judgment against the business, they may have the ability to garnish wages, place liens on property, or pursue other legal remedies to satisfy the debt.

Financial consequences: The financial consequences of defaulting on a merchant cash advance can be severe. In addition to the outstanding debt, the business may be responsible for legal fees, collection costs, and other expenses associated with the default. These additional costs can further strain the business’s finances and make it even more challenging to recover.

Conclusion

Defaulting on a merchant cash advance can have far-reaching consequences for businesses. From legal actions and collections to damage to credit scores and seizure of assets, the repercussions can be significant. It is crucial for businesses to carefully consider their ability to meet the repayment terms before entering into a merchant cash advance agreement. Seeking professional advice and exploring alternative financing options can help businesses avoid default and the negative outcomes that come with it.

References

– Investopedia: www.investopedia.com
– Small Business Administration: www.sba.gov
– National Federation of Independent Business: www.nfib.com

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