What happens if you default on a merchant cash advance?

Key Takeaways

Merchant cash advances (MCAs) offer fast funding but come with high costs, aggressive repayment terms, and serious consequences if you default — including legal action and potential seizure of personal assets.
Default can happen quickly if sales drop, payments bounce, or your business closes — often triggering immediate collections, account holds, and damage to your credit.
Safer alternatives like business lines of credit, invoice financing, or revenue-based loans offer more transparency and flexibility — and Swoop can help you explore these options.

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Page written by Ashlyn Brooks. Last reviewed on May 13, 2025. Next review due October 1, 2026.

Merchant cash advances (MCAs) are often marketed as fast, flexible funding for businesses in need of quick capital. But defaulting on an MCA isn’t the same as defaulting on a traditional loan; with that speed can come a high cost and some potentially steep consequences if repayments fall behind.

Here at Swoop, we’re all about transparency, and this guide breaks down how MCA defaults happen, what they can trigger legally and financially, and how to approach alternatives through other funding options.

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What is a merchant cash advance (MCA)?

A merchant cash advance isn’t a loan in the traditional sense. Instead, it’s a cash advance based on your future credit card or daily sales. A funder gives you a lump sum up front, and you agree to repay it through a fixed percentage of your daily or weekly sales, plus a fee (or factor rate).

Because MCAs are technically a purchase of future receivables, they aren’t subject to the same lending regulations as bank loans. This makes them easier to access but often more aggressive in repayment enforcement.

How does repayment work with an MCA?

MCAs are repaid through:

Daily or weekly ACH withdrawals from your business bank account, or
A set percentage of credit/debit card sales through your payment processor

The repayment continues until the agreed-upon total payback amount (often 1.2x to 1.5x the original advance) is fulfilled. There’s no set term; repayment speed depends on your revenue flow. This can be a problem if sales slow down, as the withdrawal amounts don’t always decrease proportionally.

What does it mean to default on a merchant cash advance?

Defaulting on an MCA means failing to meet the agreed repayment terms. That can happen in several ways:

Your business account doesn’t have enough funds for scheduled withdrawals
You try to renegotiate or stop payments without a formal agreement
You close your business or change processors without notifying the lender

Unlike a bank loan default, where processes can be slower and more regulated, MCA defaults can escalate quickly due to contract terms that favor the funder.

Causes of default on an MCA

Every business has its own set of cyclical setbacks. Whether it’s due to the economy, inflation, tariffs, or market competition, anything that affects your revenue can also be a contributor to defaulting on an MCA. Here are some of the more common causes you may see.

Decline in sales or revenue

If your business experiences a sales dip due to seasonality, market changes, or economic shifts, you may not bring in enough to cover the frequent deductions.

Business closure

If your business shuts down before the MCA is repaid, you’re still liable for the remaining balance. Lenders may pursue collections or even personal assets if a guarantee was signed.

Inability to meet daily or weekly payments

MCAs often assume consistent cash flow. But if you miss a withdrawal due to insufficient funds, you could trigger default terms, even unintentionally.

Legal and financial consequences of defaulting

MCAs do not resemble traditional collections and default procedures like a traditional loan would. The grace window (if there is any) is short and unforgiving in many instances.

Collection efforts and legal action

MCAs often lead to immediate and aggressive collection attempts upon default. This may include:

Calls and notices from collections agencies
Lawsuits filed in jurisdictions favorable to the lender
Bank account freezes or holds on future receivables

Impact on business credit score

Defaults may be reported to commercial credit bureaus, damaging your ability to secure future funding. Even though MCAs don’t always require a strong credit score up front, they can still impact it when things go wrong.

Potential asset seizure (if a personal guarantee is involved)

Many MCA contracts include a personal guarantee, which puts your personal assets, like savings or property, at risk if your business can’t repay. In some cases, lenders may move quickly to seize assets through court orders or liens.

Merchant cash advance vs. traditional loan default consequences

Aspect	Merchant Cash Advance	Traditional Loan
Regulation	Less regulated	Heavily regulated
Repayment method	Daily/weekly auto-withdrawals	Monthly installments
Default response	Fast and aggressive	Slower, structured process
Impact on credit	Business and possibly personal	Primarily business, unless personally guaranteed
Collection tactics	May include court action, bank holds	Legal proceedings through standard collections

How lenders try to recover an MCA default

We’ve discussed default, now let’s move to recovery. Lenders want what was promised to them, and they will exercise all means available in order to accomplish recovery. This typically looks like withdrawals, card holds, and in some cases, COJ clauses.

Daily ACH withdrawals or card processor holds

Some MCA agreements allow lenders to continue withdrawals—even after initial defaults—or place holds on your credit card processor to claim incoming revenue directly.

Confession of judgment clauses (in some states)

Some lenders include confession of judgment (COJ) clauses in MCA contracts. This allows the lender to bypass a court trial and obtain a judgment against your business immediately after default. These are enforceable in certain states (nine), making it easier for lenders to seize funds or assets without a formal hearing.

The goal with this is for the lenders to not have to go through a lengthy trial for their recovery efforts.

Can you renegotiate or settle an MCA?

Yes, but it depends on the funder and the terms of your contract. You should aim to discuss if this is a possibility as early as possible. Once the wheels of default are set in motion, there’s little control you will have to negotiate.

Options for restructuring payments

Here are what some lenders may agree to in terms of temporary modifications:

Reducing the daily withdrawal percentage
Switching to weekly payments
Extending the repayment period

Again, this flexibility is not guaranteed and often depends on your repayment history and communication with the funder.

Working with debt settlement professionals

If negotiations stall or a default is imminent, specialized MCA debt resolution firms can help manage the process. These professionals can sometimes negotiate settlements or prevent aggressive collection actions, but they typically charge a fee. This can vary depending on the fee type. Some fees are a percentage based on the enrolled debt, others a flat fee regardless of your amount of debt.

Legal protections and representation

In some cases, legal counsel may be necessary, particularly if your contract includes clauses like COJs or personal guarantees. A qualified attorney can:

Review the enforceability of your contract
Challenge unlawful practices
Represent you in court, if needed

How to avoid defaulting on an MCA

Avoiding default is best handled by tacking the issue early in the process, ideally before default is even on the table.

Understand the terms before signing

Many MCA agreements are dense and filled with legal language. Before signing, review the contract in full, and consider consulting a legal or financial professional to ensure you fully understand the risks.

Monitor cash flow closely

Because repayments are tied to sales volume, you’ll need tight oversight of your day-to-day revenue. Keep a buffer in your account to avoid failed withdrawals that could trigger a default.

Alternative funding options to avoid MCA risks

1. Business lines of credit

Offers ongoing access to capital with interest only on what you use. Ideal for managing uneven cash flow or covering operational expenses without daily repayments.

2. Invoice financing

Unlocks capital tied up in unpaid invoices. Great for B2B companies that need to bridge the gap between invoicing and payment.

3. Revenue-based loans

Provides lump sum capital with repayments based on a percentage of your revenue, similar to MCAs but typically with more transparency and fewer legal risks.

Get started with Swoop

If you’re navigating cash flow challenges or looking to refinance away from a high-cost MCA, Swoop can help. Our platform connects you with funding solutions tailored to your business model, whether that means exploring flexible revenue-based loans, restructuring debt, or comparing lower-risk alternatives.

Check available business loans now to discover financing options that protect your growth, not pressure it.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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