What to Do When You Are Going to Default on an MCA
What to Do When You Are Going to Default on an MCA
The Default That Already Happened
You signed a contract that was designed to place you in default. The merchant cash advance agreement in your filing cabinet contains provisions that convert ordinary business decisions into contractual breach. A change in payment processor qualifies. A second bank account opened without written notice qualifies. A single week of diminished revenue, measured against a threshold the funder did not disclose at signing, qualifies. The distinction between a performing merchant and a defaulting one is, in most MCA agreements, a matter of the funder’s timing and inclination.
This is not an abstraction. Eleven of the fourteen MCA contracts we reviewed last quarter contained default provisions broad enough to be triggered by conduct the merchant would regard as routine. The funder does not require a missed payment. The funder requires only the determination that collection has become more profitable than patience.
The funder’s monitoring systems are constructed to make that determination without your awareness. Automated surveillance of your bank feed can identify a revenue decline before you register it yourself, initiating a review of your account that remains invisible until the consequences arrive: a frozen account, a filed judgment, a UCC lien notice directed to your largest client. The default may not be an event you recognize. It may be a calculation performed while you were still open for business.
Reconciliation Is the First Weapon
Before anything else, demand reconciliation. The reconciliation clause, present in the majority of MCA agreements, requires the funder to adjust your payment amount when your revenue declines. It is the provision the funder inserted to preserve the legal fiction that the advance constitutes a purchase of future receivables rather than a loan. It is also the provision the funder does not honor.
The demand must be formal, written, and directed to the specific contractual section by number, with documentation of your revenue decline attached. What the funder does in response determines the architecture of everything that follows.
If the funder adjusts the payment, the agreement functions as drafted and the immediate pressure recedes. If the funder ignores the demand, or delays, or refuses, that response becomes evidence. In Principis Capital, LLC v. I Do, Inc., the Second Department established the controlling test: a functioning reconciliation clause is what distinguishes a purchase of receivables from a disguised loan. When the clause exists on paper but the funder treats it as decoration, the transaction begins to resemble something the funder would prefer it did not.
The New York Attorney General, in People v. Richmond Capital Group, described the reconciliation provisions in those agreements as a “complete sham.” The individuals responsible either conceded that reconciliation never occurred or invoked the Fifth Amendment when questioned. That characterization contributed to a $77.3 million judgment.
The reconciliation clause permitted adjustment. No adjustment was ever made.
You do not send a reconciliation demand because you expect compliance. You send it because the funder’s response, or silence, constitutes the foundation of your legal position.
The Contract Was Never What It Claimed
A merchant cash advance is not, by statute or by common definition, a loan. It is a purchase of future receivables. The distinction matters because loans are subject to usury statutes and consumer protection regimes that purchases are not. An MCA funder that has structured its agreement as a genuine purchase occupies a position of legal advantage. Whether that structure reflects the reality of the transaction or the preferences of the funder’s drafting attorney is a question courts have examined, over the past four years, with increasing precision.
The Principis test examines three elements: whether reconciliation is genuine, whether the term of the agreement is indefinite rather than fixed, and whether the funder assumes actual risk of loss should the merchant’s business cease to operate. When daily payments are fixed regardless of revenue, when the effective term resolves to a predetermined date, and when personal guarantees and confessions of judgment ensure recovery under every conceivable circumstance, the purchase is a loan. The label on the document does not survive the arithmetic beneath it.
In Fleetwood Services LLC v. Richmond Capital Group, the Second Circuit, in what remains the first federal appellate decision in the merchant cash advance space, affirmed that an MCA recharacterized as a loan could support not only state usury claims but civil RICO damages, a holding that transformed the funder’s exposure from the contractual amount in dispute to treble damages, counsel fees, and the particular reputational consequence that attaches to a federal racketeering finding on one’s permanent record.
New York’s criminal usury threshold is twenty-five percent. The effective annual rates on merchant cash advances we have examined have ranged from ninety percent to, in one instance that tested the limits of the calculator, eight hundred and twenty percent. The Yellowstone Capital settlement confirmed rates of that magnitude. The Attorney General obtained $1.065 billion in resolution. The number is not a typographical error.
What a Confession of Judgment Cannot Survive
The confession of judgment is the instrument the funder relies upon to foreclose your options before you exercise them. You signed it at closing. It may have appeared on the same page as a personal guarantee you did not distinguish from it at the time. It authorizes the funder to obtain a court judgment against you without filing a lawsuit, without providing notice, and with no mechanism for you to appear or contest the amount claimed. The funder presents the signed document to a court clerk. The judgment is entered. Your accounts are frozen by the following afternoon.
It can be reversed.
New York banned confessions of judgment against out-of-state borrowers in 2019, a reform prompted by reporting that documented how MCA funders had converted the clerk’s office in certain suburban counties into what amounted to a private collections apparatus. If you signed the agreement outside New York, the confession is void on jurisdictional grounds. If you signed within the state, the confession remains subject to procedural requirements that funders violate with regularity. In Porges v. Kleinman, decided in January of 2024, the court held a confession unenforceable because the affidavit failed to identify the signor’s residence as the statute requires. The defect was that elementary. The judgment did not survive it.
Where the underlying agreement is void (because the MCA has been recharacterized as a usurious loan) the confession of judgment entered on that obligation possesses no legal force. Vacatur is not discretionary. The judgment rests upon a debt the law does not recognize.
Virginia banned confessions of judgment from sales-based financing agreements in 2022. Massachusetts and Florida followed. The instrument that once served as the funder’s most efficient collection mechanism is becoming, state by state, the source of the funder’s own procedural exposure.
The Funder’s Position Is Weaker Than It Appears
The entire architecture of MCA enforcement depends upon the merchant’s belief that resistance is futile. This is, if one examines the present legal environment with any precision, the opposite of what the law provides.
In January of 2025, the New York Attorney General announced a settlement with Yellowstone Capital and twenty-five affiliated entities valued at $1.065 billion, the largest consumer settlement that office has obtained. The settlement included over $534 million in debt cancellation for more than eighteen thousand merchants. Officers and principals received permanent industry bans. Interest rates on certain agreements exceeded eight hundred percent per year, against a civil usury cap of sixteen percent and a criminal usury threshold of twenty-five.
If you hold an MCA from a Yellowstone or Richmond Capital affiliate, the Attorney General’s findings constitute administrative determinations that those agreements were illegal loans. What would have been contested litigation becomes a motion to vacate. The path from frozen account to restored account is shorter than the funder would prefer you to understand.
New York’s FAIR Business Practices Act, signed in December of 2025 and effective this February, amended General Business Law Section 349 for the first time in forty-five years. The statute now prohibits unfair and abusive acts in addition to deceptive ones, and extends those protections to small businesses. Collection tactics that were challengeable only under contract theory (aggressive demand correspondence, UCC filings directed to your clients and vendors as a pressure mechanism) now fall within the Attorney General’s expanded enforcement authority. The funder’s playbook was composed for a regulatory environment that ceased to exist in February.
There is a particular silence in a conference room when a funder’s counsel confronts the fact that the reconciliation clause was never honored. One does not hear it so much as observe it: the moment when the argument shifts from what the contract says to what the contract did.
You Still Have the Account
There are measures available to you before the funder acts, though in practice most merchants learn of them after the opportunity has passed.
The first is communication. A funder approached before formal default maintains a different posture than one approached after. Forbearance (a temporary suspension of payment obligations) is a concession funders extend when they perceive the alternative as less favorable. The alternative, from the funder’s perspective, is a merchant who has retained counsel and submitted a reconciliation demand.
The second step, which most firms fail to address, concerns the revocation of ACH authorization. Your bank can be instructed to reject the funder’s automated withdrawals. This is not a breach of the agreement. It is an exercise of your rights under the NACHA operating rules governing automated clearing house transactions. The funder will characterize the revocation as bad faith. The funder characterizes most acts of self-preservation as bad faith. The revocation preserves your operating capital during the period in which your legal position is being assessed, and that preservation is, in most cases, the difference between a business that negotiates from a position of strength and one that negotiates from a conference room that has been emptied of alternatives.
You sign the agreement and then you discover what the agreement meant.
The third consideration is documentation. Preserve every communication with the funder. Preserve records of your revenue over the life of the agreement. Preserve any reconciliation request you submitted and whatever response, or absence of response, you received. I reviewed the demand letter template we use for these matters on a Tuesday in March. The cases informing it are not hypothetical. I have examined the funder’s own internal records in a sufficient number of these disputes to observe a consistent pattern: the records tend to confirm what the merchant suspected but could not, without counsel, demonstrate.
Settlements negotiated by counsel in MCA disputes achieve reductions of thirty to sixty percent of the outstanding balance. Merchants who attempt negotiation without representation receive ten to fifteen percent. The disparity is a function of what the funder understands about its own exposure when an attorney makes contact.
Bankruptcy, and a Chapter 11 filing under Subchapter V for small businesses in particular, is not a concession. It is a mechanism. The automatic stay halts all collection. Cash collateral motions preserve operating funds. If the court recharacterizes the MCA as a loan, the funder’s secured position dissolves, and the obligation may be treated as unsecured debt or disallowed. The credible prospect of that outcome alters every settlement conversation that precedes it.
What the Contract Cannot Hold
The merchant cash advance industry was constructed upon a single legal distinction: purchase, not loan. That distinction permitted the daily extraction of revenue at effective annual rates that would constitute criminal conduct under the usury statutes of the majority of American jurisdictions. Courts and state attorneys general, over the past four years, have examined the distinction with a specificity the industry did not anticipate, and they have concluded, in a sufficient number of cases to reshape the calculus of the entire sector, that in many agreements the distinction was a fiction the paper could not sustain.
The agreement in your filing cabinet is a document. It is not a verdict. Between the contract as written and the judgment the funder seeks, there exists a body of law, an expanding set of state regulations, and a record of enforcement actions that has shifted the terms of this dispute in ways the funder did not contemplate at the time of drafting. That is the space in which this work occurs, and it is wider than you have been led to believe.
Consultation is where the conversation begins. The first call is not a commitment. It is a diagnosis.