Signing a personal guarantee for a merchant cash advance (MCA) means that you will be personally liable for the advance if the business defaults on the MCA agreement. While lenders typically require a personal guarantee for a business loan or line of credit, cash advances are often pitched with “no collateral required.”
If you have signed a personal guarantee as part of an MCA agreement, your personal assets will be at risk if your business experiences a downturn and cannot repay the advance. This is where ReconcileMyMCA.com comes in. Our experienced merchant cash advance attorneys work with businesses nationwide to reconcile their cash advances.
Let’s take a look at what a personal guarantee involves and what to do if you cannot meet the repayment terms of the MCA agreement. If you need assistance with a merchant cash advance, we can help. Contact our office today by completing the convenient intake form.
What Is a Personal Guarantee?
A personal guarantee is a legal obligation whereby you will be financially responsible for the cash advance if the business cannot meet the payment terms of the MCA agreement. In the event of default, the MCA provider can seize your personal assets, including:
- Checking and savings accounts
- Real estate (e.g. your home)
It is important to carefully review what is included in the guarantee because it should specify all the personal assets at risk if the business defaults on the advance. Despite the risks to your personal assets, signing a guarantee is usually a condition of obtaining the cash advance.
Types of Personal Guarantees in a Merchant Cash Advance
Generally, there are two types of guarantees: limited and unlimited. Your obligation varies significantly depending on which type of guarantee the funder requires.
This type of guarantee is typically utilized when multiple business owners make the guarantee. Each owner will be responsible for a certain percentage or amount of the advance if the business defaults. For example, four owners may each have a limited guarantee of 25 percent of the loan balance.
In this arrangement, one owner is the principal guarantor who is responsible for the full amount of the MCA. The funder may seize real estate, bank accounts, and other personal assets to recoup a defaulted advance.
Why Do MCA Providers Require Personal Guarantees?
Merchant cash advances and other types of alternative funding (e.g. invoice factoring) are typically backed by some type of asset or receivable. Because MCAs have less stringent credit criteria than traditional sources of funding (e.g. bank loans), a guarantee gives the funder confidence that the business will repay the advance.
Risks of Personal Guarantees
Obviously, signing a guarantee involves a significant amount of risk for the business owner. If the business defaults on the MCA, the funder can quickly take legal action to seize the owner’s personal assets. It is important to note, however, that some states have “homestead laws” which prevent creditors from seizing a primary residence or a retirement account.
While filing for business bankruptcy may allow the owner to reorganize the business debt, it does not eliminate the personal guarantee. Moreover, the guarantee also survives if the owner sells the business.
Finally, in addition to a personal guarantee, MCA providers typically require businesses to sign a Confession of Judgment whereby the business accepts liability for the advance and waives all legal defenses. In the event of default, the funder can file a judgment with the court and quickly begin to seize the business assets.
How ReconcileMyMCA.com Can Help with a Personal Guarantee
If you are at risk of defaulting on a merchant cash advance, our debt relief specialists and merchant cash attorneys can help. A properly structured MCA agreement will include a reconciliation clause that requires the funder to restructure the payment plan if the business experiences a slump.
In order to reconcile a merchant cash advance, you must notify the funder of a receivables shortfall and also show how your business will return to profitability. This is where the team at ReconcileMyMCA.com comes in. We will renegotiate the terms of your MCA with the funder to come up with a workable payment plan. If the MCA provider refuses to negotiate, you may be able to take them to court for breach of contract.
Contact Our Experienced Merchant Cash Advance Attorneys Today
Merchant cash advances are a viable source of funding for businesses that do not have access to traditional bank loans. While signing a personal guarantee is required for all types of business funding, an MCA comes with increased risk in the event of default.
At the end of the day, defaulting on merchant cash advances puts both your business and personal assets at risk. The sooner you contact our office, the sooner we can reconcile your merchant cash advance.