Merchant cash advances (MCAs) are unsecured loans that do not require collateral. This is what makes them so appealing; they offer a quick source of funds for businesses experiencing limited cash flow, and debtors don’t have to offer any assets.
However, most MCA providers will protect themselves by requiring a personal guarantee, filing a UCC lien, or both. For this article, we’ll focus on personal guarantees.
What is a personal guarantee?
When you sign a personal guarantee on an MCA agreement, you are legally stating that you’ll take personal responsibility for the debt if the business cannot repay it. In most cases, the lender can pursue your personal assets, such as:
- Savings
- Property
- Vehicles
- Investments
If the lender also files a UCC lien on your business, a personal guarantee means the lender can extend their claim beyond just the business assets. This is double security for MCA providers, but also a double risk for you.
Types of personal guarantees
There are two types of personal guarantees in MCA agreements, each with their own level of risk:
- Unlimited personal guarantee: This kind of guarantee makes you liable for the full advance amount. It allows the lender to sue you for the unpaid balance and possibly other fees, such as late charges or legal expenses.
- Limited personal guarantee: In this type of personal guarantee, your responsibility is limited. This is often the case for businesses with multiple owners. For instance, if you own half of the business, you might only be liable for half of the amount owed.
Either way, signing a personal guarantee adds a significant risk to an already risky MCA.4
How to protect your personal assets
As mentioned, signing a personal guarantee can make your personal assets vulnerable to seizure if you miss payments or default on the MCA. Taking back the guarantee is generally not possible without the lender agreeing to it, but there are potential defenses against enforcement.
For instance, you might be able to invalidate a personal guarantee if you were misled about its terms or if it wasn’t properly signed or notarized. Negotiating with the lender is another feasible option. If you miss payments, you can negotiate a pause on your payments or a new payment plan to help you recover.
In any case, working with an attorney is a smart move. Legal guidance can help mitigate the biggest risks on your personal property and, ultimately, your business.