What happens if you default on an MCA, and what to do first

Most owners who fall behind on a merchant cash advance never planned to. A slow season, a lost contract or a second advance that went wrong can leave the debits bigger than the deposits. What happens next depends on 2 things: whether you are dealing with slow sales or a real default, and how early you act.

Slow sales are not a default

The funder bought a share of your receipts and took the risk that they would come in slowly. The SEC-filed agreement we reviewed says so directly: if receipts arrive more slowly because the business slowed down, or never arrive because it closed in the ordinary course, and the merchant has not breached the agreement, the merchant “would not owe anything to Buyer and would not be in breach of or default under this Agreement.”

New York appellate courts treat that shared risk as the core of the deal. In Principis Capital v. I Do (2d Dept 2022), the payments moved with sales and filing for bankruptcy was not an event of default, so the agreement was not a loan.

In LG Funding (2d Dept 2020), the contract made bankruptcy and a written admission of inability to pay into defaults, and the court found a triable question over whether it was a loan. The tool for slow sales is reconciliation, not a missed payment.

What counts as a default

The SEC-filed agreement lists these events of default, among others:

• Interfering with the funder's right to collect its weekly amount.
• Using more than one deposit account without written consent.
• Changing your deposit account or card processor without written consent.
• Breaking any term or covenant of the agreement.
• Defaulting on any other agreement with the same funder.

Other contracts add bankruptcy or a written admission that you cannot pay, as in LG Funding. A false statement in your application can count too, because performance guaranties like the ones in recent New York cases cover the business's representations and warranties as well as its covenants.

What a funder can do after a default

The guaranty is where a business problem becomes a personal one. A guaranty of performance does not make you pay because sales fell, but blocking debits or moving accounts is a broken covenant, and that is exactly what it covers.

A confession of judgment cannot be filed in New York against someone who did not live in a New York county when signing or at filing, and Texas bars them in commercial sales-based financing. Our guide to confessions of judgment covers the details.

The New York Attorney General has alleged that Yellowstone Capital sued for full repayment when merchants missed just a few payments. That is an allegation, but it shows how fast a missed stretch can become a lawsuit.

Steps to take early

1. Read your default and reconciliation clauses. Know what counts as a default before you do anything.
2. Request reconciliation in writing, with the documents the contract names. In a 2025 New York appellate case, a merchant that never used the procedure could not argue it was a sham.
3. Call the funder, then confirm in writing. One funder's own advice on missed payments is that open communication is often the key to avoiding fees, collections and lawsuits. Get any reduced payment plan signed.
4. Do not block debits, close the account or open a new one without legal advice. Those moves are listed defaults with their own fees.
5. Do not take another advance to cover the debits. Our guide to stacking shows where that leads.
6. Keep records: statements, emails, call notes and every notice you receive.
7. Treat debt settlement pitches with care. The FTC warns that such programs often tell you to stop paying and that you can be sued while you wait.

How to approach the funder

• Your sales now versus when you were funded, from bank statements, not memory.
• What changed and for how long, such as a lost customer, a closure for repairs or a slow season.
• The payment you can actually make and the date you expect sales to recover.
• A specific request: a reconciliation, a temporary adjustment of the debit, or a written payment plan. Forward Financing's published contract highlights describe a “temporary downward adjustment” customers can request.
• Fees: ask whether returned-debit and default fees will be waived if you keep to the new plan.

After any call, send a short email that restates what was agreed, the new amount and the dates. If the funder's reply disagrees, you want to know now, not after the next debit.

Do not agree to a plan you cannot keep. A missed payment on a new plan can leave you worse off than before, and any promise made on a call should be confirmed in writing the same day.

When to call a lawyer

• A default notice or demand letter.
• A summons and complaint. Court deadlines to respond are short.
• A confession of judgment filed or a judgment entered.
• A frozen bank account or money taken from it.
• Letters to your customers or card processor telling them to pay the funder.
• A demand on your personal guaranty.
• Signs the advance works like a loan: fixed debits that never tracked your sales, or reconciliation refused.

Bring the contract, the guaranty, any confession affidavit, your payment history, bank statements and every message. If the funder has contacted your customers, also read our guide to UCC filings.

What enforcement actions show

In 2021, Yellowstone Capital and related parties agreed to pay $9.8 million to settle FTC charges, including that it kept withdrawing money for days after businesses had paid their balances. In January 2025, the New York Attorney General announced a $1.065 billion judgment against Yellowstone, which required the companies to cancel more than $534 million owed by over 18,000 businesses nationwide and to vacate unsatisfied judgments.

In February 2024, the Attorney General announced a judgment of more than $77 million against Richmond Capital Group and related companies. That same month, in the FTC's federal case against the same operation, a court entered a $20.3 million judgment against one of its operators, Jonathan Braun, along with a permanent industry ban. Outcomes like these took years. They are not a plan for your business, but they are a reason to report deceptive treatment to your state attorney general and the FTC.