An Intelligent, Assertive Lawyer In Brooklyn Serving Businesses Throughout The Nation
  1. Home
  2.  | 
  3. Merchant Cash Advances
  4.  | What is the downside risk of a merchant cash advance?

What is the downside risk of a merchant cash advance?

On Behalf of | Mar 22, 2024 | Merchant Cash Advances, UCC Liens

As a small business owner, you may have considered or already taken out a merchant cash advance (MCA) to meet your financial needs. However, it’s crucial to understand the potential downsides and risks associated with this type of funding.

What are MCAs and how do they work?

An MCA is a lump sum of capital given to a business in exchange for a percentage of future credit or debit card sales. While this can provide immediate relief for cash-strapped businesses, it can also lead to significant issues down the line, particularly if you default on your payments. One such consequence is the filing of a Uniform Commercial Code (UCC) lien against your business by the MCA company.

Some potential downsides and risks of UCC liens include:

  • A UCC lien serves as a public ‘flag’ that your business owes money. This can deter potential lenders, investors, or buyers.
  • UCC liens can make it difficult for you to secure loans or lines of credit.
  • They can lower the selling price of your business.
  • In severe cases, defaulting on an MCA could lead to asset seizure – including equipment, inventory, and cash accounts.
  • UCC liens can damage your credit score, making future financing more difficult.
  • Lastly, defaulting on an MCA can lead to lawsuits and court judgments against you.

An attorney experienced in this niche area may be necessary to remove the UCC lien on your property in a timely fashion, even if you have paid the MCA back. Lenders do not always remove their liens promptly.

MCAs might seem like an easy solution for immediate funding needs, they come with considerable risks that could hinder your business’s financial growth. It’s essential to weigh these risks carefully and seek legal advice before making any decisions.