Events of default: what actually puts you in default

"Default" is the word that turns a hard month into a legal problem. Many owners think they only default by missing a payment. In an MCA, the list is often longer, and the items on it are about your behavior, not just your sales.

What "default" means

Your agreement has a section, usually called "Events of Default" or "Default," that lists the things that let the funder treat the deal as broken. It also says what the funder may do next. The wording differs from one agreement to the next, so this guide describes patterns, not rules. Check your agreement's exact wording.

Common triggers

These show up in many MCA agreements in some form.

1. Blocking or reversing debitsTelling your bank to refuse the funder's withdrawals, reversing a payment, or putting a hold on the account. Even a good-faith dispute can fall under this clause.
2. Changing or closing the bank accountMany agreements require you to keep the designated account open and to ask before switching. Moving deposits elsewhere without telling the funder can break that promise.
3. Taking another advance (stacking)Some agreements forbid new financing that comes ahead of or alongside the funder's claim, without written consent. See Stacking and renewals.
4. Selling, closing or moving the businessSelling, shutting down, changing the business name or ownership, or moving locations without notice can be a listed event.
5. False or misleading statementsIf the application, statements or bank records you gave were wrong in a way that matters, the funder may say you broke your promise of accuracy.
6. Diverting receivablesSending customer payments to a different account, processor or payment app so they skip the funder's collection.
7. Not giving required informationSome agreements require statements on request or access to bank data. Ignoring a request can be listed as a default.
8. Other cross-defaultsDefaulting on another financing deal, a tax lien, or a lawsuit against the business can appear as triggers.

Notice the pattern. Most of these are about what you do with the money and the accounts. They are different from the ordinary risk the funder accepted, which is that your sales could be lower than hoped.

What can follow

The agreement says what the funder may do after a default, and some of it can be serious. Common items include:

• Acceleration. The funder says the whole unpaid purchased amount is due now, not over time.
• Default fees or higher charges. Some agreements add a fee, or a percentage of the balance, after a default. Whether those are allowed is a legal question.
• Notices to your customers or processor. If the funder has a lien, it may tell people who owe you money to pay the funder instead. See UCC-1 liens.
• Calling the guaranty. If an owner signed a personal guaranty, the funder may turn to that person. See The personal guaranty in your MCA.
• A lawsuit or a confession of judgment. If your agreement has one, the funder may use it. See Confession of judgment.
• Collection costs. Many agreements make you pay the funder's legal fees if it sues.

These are possibilities listed in contracts, not predictions. What actually happens depends on the funder, the wording, the facts and the law of your state.

What is usually not a default

In a true-sale MCA, the funder bought a share of your future sales and accepted the risk that they might be smaller. That idea is the reason the product exists. It leads to a few points, each of which still depends on the contract:

• Sales simply falling is the risk the funder took. Falling sales alone are not usually listed as an event of default. Many agreements instead give you a reconciliation clause for that situation.
• Asking for a reconciliation is using a right the contract gives you, not breaking a promise. Do it in writing, as the agreement says.
• Telling the funder early that a payment will be short is not itself listed as a default in most agreements. Waiting until the debit bounces is riskier.
• Hiring a lawyer or an advisor is not a default.

One more reason the wording matters: some agreements say a default can be declared for "any breach," while others list only specific events. Some give you a short time to fix a problem after a notice, and some give none. Two merchants who do the same thing can end up in different places because their agreements differ.

How to read yours

1. Find the Events of Default or Default section and number each trigger on paper.
2. Next to each, write whether you are doing it, are close to doing it, or are not.
3. Look for a cure period: a number of days to fix a problem after a notice. Many agreements have none for some triggers and a short one for others.
4. Read the "Remedies" section for what the funder may do and whether notice is required first.
5. Check whether you have to tell the funder before certain changes, such as a new account or a sale of the business.

Reading your MCA contract covers the other sections you should know alongside this one.

If you get a notice

Education only. FairMCA is not a law firm.

Education only, not legal advice. Agreements differ; your contract's exact wording controls.