What Happens When You Default On a Merchant Cash Advance?

Last Updated:

We may earn commissions for purchases made through links on our site. Learn more on our about us page.

Personn wearing black hoodie workinh on laptop and holding a mobilephone - What Happens When You Default On a Merchant Cash Advance?

If you’re a small business owner, you’ve probably heard of merchant cash advances as well. It could be access cash for your business. What happens if you can’t pay back that advance? 

Well, fear not! We’re going to explore the ins and outs of defaulting on your merchant cash advance and what it really means for you and your business. So hopefully, by the end of this, you’ll have a clearer understanding and be able to plan accordingly.


What is a Merchant Cash Advance and How Does It Work?

To be clear, a merchant cash advance for a small business is a lump sum of cash that a business owner receives in trade for a share of their forthcoming credit card sales.

So how does it work exactly? Let’s say you own a small business and need some extra cash to buy new equipment or hire more staff. You apply for a merchant cash advance, and if you’re approved, you’ll receive a lump sum of cash upfront. 

But here’s the catch- the lender will take a percentage of your day that credit card sales until the advance is paid off, plus interest and fees. 

So, overall, merchant cash advances could be a helpful funding option for small businesses in need of quick cash. But, like with any financial decision, make an informed choice.


What Are the Typical Terms and Conditions of a Merchant Cash Advance?

If you’re considering a merchant cash advance, knowing the typical terms and conditions is important before you sign on the dotted line. Here are some of the key things you should know:


  • Repayment terms: As you mentioned earlier, merchant cash advances are repaid through a percentage of your daily credit card sales. 


  • Their pay period can vary but is typically around 6 to 12 months. Make sure you understand exactly how much you will be paying back and how long it will take.


  • Factor rate: Instead of an interest rate, merchant cash advance uses something called a factor rate To calculate fees. 


The factor and the total repayment amount. For example, if you receive a $10,000 advance with a factor rate of two, you’ll need to pay back $12000.


  • Fees: In addition to the factor rate, there’ll be other fees related to the merchant cash advance, such as origination fees, processing fees, and underwriting fees. 


  • Ensure you understand all the fees involved so you can accurately calculate the total cost of the advance.


  • Collateral: Unlike traditional loans, a merchant cash advance usually doesn’t require collateral commanders may require a personal guarantee which means you’re further payment of the advance.


  • Early repayment: if you’re able to pay off the advance early, some lenders may offer a discount on the remaining fees.


  • Credit Requirements: Merchant cash advances are typically easier to qualify for than traditional loans, but lenders will still look at your credit history and business performance.


What Happens When a Borrower Defaults on a Merchant Cash Advance?

OK, we’ve talked about a merchant cash advance and how it works. But what happens if you can’t make your payments and default on the advance? Let’s take a look at what could potentially happen:


  • If you miss a payment, the lender will likely start calling and sending letters to collect the debt; they may also add late fees and additional charges to the amount owed.


  • If the lender has the debt through normal means, they may take legal action against you.


  • Like with any missed payments, defaulting on a merchant cash advance can hurt your credit score. 


  • In some cases, the lender may be able to seize assets or equipment as collateral for the advance.


Are There Any Legal Consequences or Penalties for Defaulting on a Merchant Cash Advance?

Above, we discussed some of the things that could happen if you default on your merchant cash advance. Other than the damage to your credit score, here are a few other allowing yourself to be consequences:


  • The lender could potentially file a lawsuit against you to collect the debt.
  • The lender could turn over your debt to a collection agency.
  • If you signed a personal guarantee for the loan, you may be personally liable for the debt. This means that the lender can go after your personal assets, such as your home. 


What Are Some Alternative Options for Small Businesses in Need of Funding That May Be a Better Fit Than a Merchant Cash Advance?

Although they could be suitable for some firms, merchant cash advances aren’t always the greatest solution. Here are a few to take into account if you’re seeking alternative funding options:


  • Small business loans
  • SBA loans
  • Crowdfunding
  • Invoice financing
  • Business credit cards


Final Thoughts on What Happens When You Default On a Merchant Cash Advance

Therefore, merchant cash advances can provide small businesses with a speedy source of revenue, but they also have certain potential hazards and drawbacks. 

If you’re thinking about making this choice, be sure you comprehend the terms and circumstances as well as what would happen if you don’t pay. 

You may obtain the cash you require without endangering your financial future by completing your homework and selecting the best choice for your company.


Leave a Reply