What happens if i default on a business loan

What Happens if I Default on a Business Loan?

Introduction to Default

“What happens if I default on a business loan?” It’s a scary question—and an even scarier reality. But it doesn’t have to mean the end for you or your business. Let’s talk about your options and how you can fight back. Defaulting on a loan isn’t the end; it’s an opportunity to pivot. I’ve helped countless business owners face this situation, and it’s possible to come out stronger—even against Merchant Cash Advance (MCA) lenders. MCA lenders are dangerous. They are predatory. And they will act like you have no other choice but to surrender to them. But that’s not true. With the right defense, you can fight back—and win. Let’s talk strategies.

What Default Means and What MCAs Do

Default means you missed a payment—or couldn’t meet an obligation of the loan agreement. MCA lenders use this to come at you aggressively: penalties, acceleration clauses, and lawsuits. They push—and they push hard. But that’s where an experienced MCA attorney can be your lifeline. We know their tricks, their weaknesses, and the laws they often abuse. And we use them to fight back.

A key point—MCA agreements often look like factoring deals. But courts like in Kapitus Servicing, Inc. v. Suburban Waste Services, Inc. said otherwise. No proper reconciliation clause? It’s a loan. And usury laws apply. In Kapitus, the court found the agreement lacked a meaningful reconciliation clause. MCAs that can’t prove real “risk sharing” are treated as loans, not factoring agreements. And that can make all the difference for you. Most MCAs claim they “purchase” a percentage of your future receivables. But when they enforce fixed daily payments instead—guess what? That’s a loan. They’re dodging laws meant to protect you, and it’s our job to expose that.

New York has strong usury laws—16% for civil, 25% for criminal. MCA lenders? They often exceed these. If we can prove your MCA is actually a loan, their interest rates suddenly become illegal.
Let’s not forget California. In CA, a loan is usurious if it exceeds 10% (unless exempt). If your MCA lender pushed you beyond that limit—yeah, it’s likely illegal. This defense can be life-saving.

But it’s not just the rate. MCA agreements often enforce personal guarantees. These are terrifying—and they make you feel like everything you own is at risk. But these guarantees aren’t always enforceable. Here’s why. Personal guarantees hinge on proper disclosure. If lenders failed to clearly explain risks, or misrepresented terms, they can be void. Courts don’t look kindly on shady practices that trick you into risking everything.

Partial Victories and Their Importance

Remember, MCA lenders thrive by pushing you into corners. They don’t want you to think you can win. But even a partial victory can change everything. Partial victories are not just crumbs—they’re lifelines. Waiving penalties, lowering interest rates, or getting rid of personal guarantees can be huge wins. You might not eliminate the debt, but you make it survivable.

In the Kapitus case, the court denied summary judgments for BOTH sides—because neither could prove their stance fully. This means when lenders can’t establish their right to enforce all clauses, we gain leverage to renegotiate. Renegotiating can mean converting an MCA into a standard loan—with a capped interest rate. That’s a partial win that could mean the difference between survival and bankruptcy.

A good MCA attorney will dig into those reconciliation clauses. If there’s no real adjustment based on actual income, it’s a disguised loan. Disguised loans come under usury laws. We fight for those adjustments—or expose the lender. I’ve seen businesses drowning in MCAs, where fixed payments broke their backs because income was too variable. True factoring adjusts to income. MCAs that force fixed daily payments are loans. Courts can see this.

Bankruptcy. Yes, I said it. Sometimes it’s not a death sentence—it’s a tool. Chapter 11 allows reorganization. It’s a strategic move that can restructure debt and let you keep your business alive. It buys time, and time wins. In California, under Chapter 11, you can propose a repayment plan that modifies MCAs. Lenders hate this because they lose their leverage. Filing early can also stop them from suing—and force negotiations.

But what if you can’t go for a full win? Let’s say the judge is skeptical. Partial victories include simply delaying proceedings. Time can give you the breathing room to get your cash flow in order. Don’t underestimate time wins. A lender pushing for immediate payment under an acceleration clause can be challenged. If an acceleration clause lacks clear basis or reasonableness, it can be struck down. You gain time—and time lets you fight.

In Florida, acceleration clauses are often scrutinized for fairness. If a lender accelerates payments arbitrarily, that’s challengeable. We’ve used this before to block aggressive lenders.

Reconciliation Provisions and Contract Terms

Let’s go deeper into reconciliation provisions. This provision should let you adjust payments based on actual revenue, monthly or quarterly. If it’s missing, the lender is trying to avoid treating your income as variable—and that’s a defense. Without reconciliation, MCA is demanding fixed payments regardless of your income. Courts see this as “fixed indebtedness”—more loan-like than purchase. We argue that, and it shifts the nature of what’s being enforced.

Personal guarantees. Scary, right? But they are not unbreakable. Sometimes, courts strike down guarantees if the underlying agreement is found unlawful, especially if it’s usurious. Texas has strong protections against enforcing personal guarantees if the original loan is found to be exploitative. And many MCAs cross that line, making personal guarantees void. I’ve seen clients trembling when lenders came for personal assets. But we dug into contract terms, showed lack of disclosure, proved it usurious, and walked out with those guarantees unenforceable. They had no choice but to settle favorably.

Another thing—penalties. Lenders LOVE adding penalties to defaults. But these are not always enforceable. Courts tend to reject penalties if they look more punitive than compensatory. We use this. In New York, under General Obligations Law Section 5-501, if penalties are deemed unreasonable, they’re struck out. We’ve saved clients thousands just by challenging these aggressive penalty structures.

Settlements are your best friend. MCAs don’t want to settle, they want you to pay in full. But skilled negotiation can push settlements—especially when we highlight flaws in their contracts. An MCA lender doesn’t want a court fight if the clauses are murky. We bring out these flaws and use them to force settlements. They get a percentage of what’s left—and you keep your business afloat.

Bankruptcy recourse clauses? They’re scary, sure. They make it seem like there’s no way out if things go south. But clauses that demand full enforcement upon filing for bankruptcy weaken the lender’s position in proving risk-sharing. Lenders say MCAs are “purchase of future receipts”—but if they have guarantees that activate upon bankruptcy? It’s clear they’re trying to enforce a loan, not buying risk. Courts use this against them. Take Illinois. Courts here often differentiate between genuine factoring and disguised loans by examining what happens in insolvency. No shared risk? They favor the borrower. It’s how we keep clients fighting.

More Defense Strategies and Legal Tools

The reconciliation clause isn’t just a technicality—it’s a tool. If the contract doesn’t explain HOW to reconcile, or penalizes you heavily for missing info, we push that it’s an unfair and therefore unenforceable clause. In Kapitus v. Suburban Waste, there was a mention that the contract “forfeits rights to reconciliation” if info was missing. This unfair approach was part of why the lender couldn’t get summary judgment in their favor.

We also talk about time horizon in MCA contracts. Real factoring agreements don’t have hard “end dates.” MCAs often do, and that turns them into finite loans. We argue this to recharacterize them.

Acceleration clauses. Let’s talk about them. Lenders use these to suddenly make the entire debt due. But if the clause lacks clarity, or was triggered unreasonably, we challenge it and slow things down—and that buys us time. I once had a client—a bakery owner. The MCA lender came down hard, accelerating payments and demanding everything upfront. We showed the clause wasn’t clear on “conditions for acceleration”—the judge froze it, giving us leverage to renegotiate.

Renegotiation. It’s not always about winning outright. Sometimes, it’s about buying time, about lowering what’s owed, about getting rid of guarantees. A partial win can still save your business. Remember Richmond Capital v. Davis? The court emphasized payment variability. If your MCA forces fixed payments regardless of income, that’s not factoring—that’s a loan. Loans are regulated; factoring isn’t. Factoring agreements are supposed to share risk. If your agreement only puts risk on you—and the lender demands guarantees, daily fixed amounts, and payments even during cashflow drops—that’s not factoring. That’s predatory.

MCAs will argue they take on risk. We show they don’t. We bring out every guarantee clause, every fixed payment term, and every acceleration condition that clearly indicates their intention is to secure fixed repayment regardless of risk. And that’s how we win—whether it’s knocking off penalties, reducing principal, eliminating interest, or just buying you time. Every step taken to reduce the burden makes a difference in your financial life.

Real Stories: Clients Who Won

Personal stories are powerful. Jane, one of my clients, had an MCA demand her house as collateral after default. We challenged the usurious interest rate, argued lack of proper reconciliation—and they had to back off. She kept her house. David, another client, faced aggressive MCA collection. They had misrepresented terms. We leveraged NY usury laws and got a favorable settlement—far below what they originally claimed. They thrive by fear; we counter with facts.

If you think it’s over because you defaulted, it’s not. With the right attorney, you can challenge clauses, you can renegotiate debt, you can fight back against predatory practices.

Florida’s Statute § 687.071 criminalizes usurious loans. If MCA lenders pushed you above 25%, we challenge them on those grounds. We’ve forced lenders to drop amounts they couldn’t legally charge.

Not all battles are won in the courtroom. Mediation works too. Sometimes we use flaws in their agreement to push them towards settlement in mediation. They don’t want a judge looking too closely, so we use that fear. MCA agreements are full of holes—holes we can exploit. And even if it feels like a losing battle, remember: every small victory adds up. Every waived penalty, every delayed payment buys you breathing room. If the lender is claiming rights upon default, check the recourse language. Does it imply no risk on their side? Does it enforce conditions even when revenue drops? That’s not factoring; that’s predatory lending.

Conclusion: It’s Not Over

I am passionate about this because I have seen what happens when MCA lenders get their way. Business owners lose homes, dreams, and livelihoods. But it doesn’t have to end like that. Richmond Capital Group v. Davis taught us that payment variability matters. Fixed obligations are not characteristic of real factoring. When your revenue drops, your payments should too—if not, they’re lying about their intent. If you’re drowning in MCA debt, know that there are ways to fight. There are always ways to push back, to delay, to negotiate. Don’t lose hope. We’ve saved many, and we will continue to fight.