What happens if you default on a merchant cash advance is that the funder and or debt collector can come after you and collect their money from you personally or your business. The funder may freeze your personal and business bank accounts, and even disrupt your relationships to your vendors, payroll company, and much more like real estate purposes and other assets.
When you don’t pay back the debt in one way or another, you will get a default with a judgment in place and this is a ruling entered by the court of law and you’re basically being sued. Default judgment usually rise when one party to a lawsuit fails to perform a court-ordered action or fails to respond to any formal complaint.
Once you get the default judgment, you no longer have the ability to challenge or defend yourself against the lawsuit.
Luckily, there are ways to avoid a Merchant Cash Advance default and what to do in case you are on the brink of defaulting and what to do once you have, let’s check it out, but first…
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Merchant Cash Advance Default Rate (TRUTHS May Shock You!)
Factoring in what happened with COVID and before as well as after, the default rarte with MCAs sit at around 50%. Ther are 1,000's of business owners per year who end up in collections, with default judgments and more reprecusions.
10 Tips To Avoid A Merchant Cash Advance Default (Before Application And After)
There are LOADS of tips to help you avoid defaulting on a merchant cash advance loan but I’ve narrowed down the top 10 for both before you apply for one and after you have the funding, starting with before...
- Cut back on costs. Due to your MCA payments being based on your overall monthly receivables, you can take a big set back especially if you don’t get paid right away (getting paid on terms, think 30-60-90 day net terms), and your cash flow can take a dip if you’re not strong cash-flow positive, so you’ll want to cut costs back internally, meaning what and where exactly?
- You can try cutting back on marketing expenses which is where most people start but even better is to look at trimming any additional products and services along with the marketing and advertising that comes with it and focus on the one product/service that delivers you the highest ROI and double down on it even more than the others or completely.
- You can also try hiring freelancers or contractors to help you save money on your labor costs, or either renting cheaper or expensive equipment instead of buying it outright.
- You can also negotiate and renegotiate your terms with your vendor(s) or suppliers to lower your costs for a set period or for good.
- Think Your Business Plan Through. This should be #1 but because you should look at where costs are high and how to trip, this is also another way to balance that when you put together not only plan A, but b and c. If plan A is so good, why have another plan behind it? Simple, you have to know in this case of a company change/shift and market conditions raising and lowering prices and supply and demand as well as even closer on a customer base, you have to be ahead of the game.
- Focus on short and long-term plans and understand your daily ROI activities as well as Financial ROI ones
- Create a growth and expansion plan where you understand your ROI and more
- Understand Your Finances. Point, blank, period. You MUST (and I stress this to all my clients before and even after funding), know what money comes in, when and where it goes, and how to track your revenue and expenses. Understand the differences between Net operating income and gross profits, cost of goods sold and much more.
- You might be that business owner/entrepreneur who does everything and anything in their business doing multiple roles and or you just don’t get around to seeing your numbers and what they mean. If that’s the case, hire a CPA or someone in a similar role to handle your books/bookkeeping and more. This is the #1 key difference for someone who understands come offer stage if the amount they are getting is doable or not.
Now, when you have your funding and al there are other stages but everything above in the “Before” part applies still especially if you haven’t done that yet and perhaps will be coming back for more funds with these as well:
- Restructure Your Debt. Before we get to consolidation/refinance, the #1 place to look is in debt restructuring where if you’re falling behind on your payments, it’s best to contact the funder/MCA company as soon as you can and they may be able to work out a deal to help restructure your debt.
- For example, You may be able to negotiate a short forbearance period to give your finances a short breathing room.
- Most MCA contracts also contain this provision known as reconciliation or a readjustment so if your business income fails, you won’t be able to make original payments according to the original terms, therefore, the MCA company must then restructure your payments in a more affordable way, or else they’d be considered a usurus (illegal) lender.
- Get An Attorney-Led Debt Restructuring Team. The best thng you can do (By Miles) is to get an Expert Attorney-Led Debt Restructuring team with Decades of experience who will renegotiate your credit notes and get your debt payments lowered on average between 50%-75%+ in Days, without Any new loans. This way you don't go at it alone and mess it up (many people do and when they do it alone, it either doesn't work or you just have your payments stopped for a short time. Click here to see my #1 recommended debt restructuring option.
- Get Debt Consolidation. If you want to get out of your MCA contract altogether, then you’ll want to do a debt consolidation which involves various ways one of those being taking out an installment loan and using those proceeds to pay for your MCA. Instead of having a portion of your daily sales deducted, you’ll only be responsible for making one fixed payment per month over several years, and it could be somewhere between 1-5 years or so.
- The interest rate for the option above is going to be Much lower too. Especially if you hve good credit, it will drop your rates and increase your terms.
- For option 2: You can consolidate the remaining balance on a “first position” MCA where you have closer to 90%-100% paid off so it can be moved over to a “Monthly Term Loan” lender and option for a private lender. These term loans are generally between 1-2 years, sometimes up to 3 years (36 months) in the market like Today. This doesn’t always work, especially if your DTI is too high, we don’t want to burry you in another payment at the end of the month where you make one lump sum payment
- Option 3: You can do a debt consolidation and even refinance under the SBA which happens every day and I have helped out plenty of business owners do this and will keep doing so. The SBA 7a has favorable terms up to 10 years in capital and up to 25 years if real estate related.
Related: SBA 7a Reviewed
More Options Continued...
- Hire a Debt Relief Lawyer. If you get worried about falling behind payments and defaulting or are already close to it and perhaps close to facing a lawsuit (default judgment in place), then you should look at hiring an MCA debt settlement attorney. Attorneys are skilled and specialized in negotiating business debt settlements which could result in paying less than you owe. If you’d like to learn more about debt settlement and reconstruction, click here.
Final Thoughts And Next Steps…
Did you learn something new today that made you say “Wow, I did not know that and happy I did?”
Merchant cash advance defaults happen every day and it’s hard to avoid for the majority of business owners because of a lack of preparation and here’ 's why…
They don’t have “Solid and strong cash-flow positive” enough to carry them over months and even years so they underestimate or take on more expenses and overhead than what they can chew, Plus…
When the money is being used for just “survival” and COVID Relief purposes without any growth and expansion that can double, triple, and quadruple your revenue, that’s where owners fall behind. The money becomes too expensive for them to be able to pay back and end up going negative or already are.
So you can avoid this by having a strong plan a, b, and even c in the case of changes in your business and the market, possibly restructuring your debt, speaking with the lender to lower your payments temporarily, doing a debt consolidation, and even higher an attorney if need be but Ultimately is this…
Know your numbers! Understand your finances very well and hire someone who can help you if need be so you know what numbers you need to shoot for and what’s the right amount of money to take out and if you can afford to take it on.
If you’re ready to get started with Debt Restructuring and potential other options, see here, and if you're ready for funding and want to see my #1 recommended MCA alternative service which is a “Hybrid Advance/Term Loan” that is generally 50% cheaper and encompasses looking at ALL revenue coming into your business, and getting the best lender and underwriters online to give you maximum funding and the best benefits…
Then click the button below to get started with funding.