What You Need to Know About MCAs and Personal Guarantees

A merchant cash advance (MCA) provides a cash-strapped small business with quick access to working capital. These alternative funding products carry more lenient credit criteria than traditional business loans and are often pitched with “no collateral required.” 

In reality, MCA agreements often include onerous provisions such as a Confession of Judgment and a personal guarantee that could jeopardize both your business and personal assets in the event of default. If your retail store, restaurant, hair salon, or other small business cannot repay a merchant cash advance, it takes an experienced debt relief specialist to protect your life’s work. Let’s take a look at the perils of personal guarantees in a merchant cash advance. 

Why do small business owners sign personal guarantees?

You’ve probably encountered personal guarantees in the course of running your business. Any business that uses a line of credit for purchases will likely be required by the vendor to sign a personal guarantee. In the event that the company cannot pay back the debt, the guarantor (the business owner) may either have to sell assets to repay the debt or file for bankruptcy.

Creditors also use personal guarantees to ensure that a financial obligation (e.g. a business loan) will be repaid, particularly when lending to small businesses because there is a greater risk of failure. And personal guarantees are becoming the rule of thumb in merchant cash advances, which puts business owners who are struggling to survive these unprecedented times in a tough spot.

Filing a Business Bankruptcy Does Not Discharge Personal Guarantees

Filing a Chapter 11 bankruptcy may allow you to reorganize your business debts, provided you can convince the bankruptcy court that your business will remain viable. However, you must submit a proposed reorganization plan and your business must be able to generate sufficient revenue to cover the payment plan.

While a business bankruptcy allows you to reorganize your business debt, your obligation to honor personal guarantees survives. You remain liable for the company debt even when your business is not generating revenue. The only exception is for businesses set up as sole proprietorships, in which the owner can file a Chapter 7 bankruptcy and liquidate the business. But there is an alternative.

How to Reconcile Your Cash Advance

If you are at risk of defaulting on a merchant cash advance, you have options. A well-conceived 

MCA agreement will include a reconciliation clause that requires the MCA provider to restructure the payment plan, as long as you promptly notify that provider of any receivables shortfall. If the MCA provider refuses to reconcile your cash advance, you may have grounds for a lawsuit and be able to get out of the merchant cash advance entirely.

Why This Matters

As small business owners grapple with the fallout of the COVID-19 pandemic, many may turn to merchant cash advances to stay afloat, only to find themselves bound by a personal guarantee and forced into bankruptcy. In the end, the best way to protect both your personal assets and your business is to contact an experienced debt relief specialist who can negotiate with your MCA provider to reconcile your cash advance.