Defaulting on a merchant cash advance: What you need to know

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Written by Michael Foote, Insurance and Finance Expert

Michael Foote is the founder of Quote Goat and has over 13 years experience working in the finance, insurance and currency sectors. Since launching Quote Goat he has appeared on TV as well as many of the largest online publications including Forbes, The Telegraph and The Metro. Prior to Quote Goat, he worked in finance in the city for a number of firms including HSBC.

A merchant cash advance is an important source of quick income for a large number of UK industries, from the motor trade to restaurants. The process frees up available capital that companies can invest immediately and pay back through percentages of their credit card transactions on a weekly or monthly basis. Read more on why you should consider a merchant cash advance.

This loan system works best for companies that receive consistent cash flow through their card transactions; bars and restaurants are a prime example of the type of company that benefits the most from merchant cash advances.

Every business, even the most successful, will see sales fluctuate throughout the year through no fault of their own. These fluctuations can simply be seasonal and can be predicted, some can be more spontaneous and difficult to plan for, like the COVID-19 lockdown response, for example.

Merchant cash advances are easy to obtain compared to other more traditional loans. If you default on any repayments, however, it can adversely affect your business.

Personal Guarantee

By defaulting you may be sued by your lender. Part of the agreement for your merchant cash advance may include a personal guarantee; this means if you fail to pay back your loan your personal assets may be repossessed.

Bankruptcy and Debt Collectors

The steps that occur if you fail to repay your loan are clear; your credit score will go down, making it harder to source funds in the future and could make it difficult to deal with your bank. Business will also feel as though they have to file for bankruptcy. From there lenders will send debt collectors to your business to collect your outstanding debts through your equipment and other resources.

This is why it is vitally important for businesses to balance the risk vs the reward in advance of taking out an MCA and knowing how they are going to make their repayments to ensure they don’t get into financial difficulty.

With Quote Goat you can compare merchant cash advances to ensure that your business qualifies under the right criteria. You may also like to consider invoice finance as a cheaper source of capital if you have money tied up in unpaid invoices.