If you stop paying your merchant cash advance, what happens next is usually pretty quick. Once a scheduled debit bounces, they will probably try it again, charge you a fee, and start calling you and the guarantor. Within 2 weeks they will likely send a notice that you are in default and that they are going to collect the whole amount due. Most states require that they get a judgment before they can freeze your bank.
Many business owners want to know, “If I stop paying my MCA what will happen next?” This article addresses the first 14 days. For what comes after, see what happens when you stop paying a merchant cash advance.
What happens in the first three days after an MCA debit bounces?
A bounced debit usually comes back for insufficient or uncollected funds, codes R01 or R09, and your bank generally has two banking days to send the ACH debit back to the funder. They will probably try the debit again, and every attempt can incur charges: one agreement filed with the SEC charges a $50.00 “NSF/Rejected ACH Fee” each time, and your bank will charge its own fee too.
The funder can keep trying to debit your account, but they can only debit what they are authorized. In FTC v. RCG Advances, the contracts authorized the funders to take “the specific daily amount each business day,” and in 2023 a federal court found that their double debits and larger debits were an unfair practice because they were not authorized.
If you revoke authorization or put in a stop payment, the debit will not bounce back with an R01 code; it will come back as R29 or R08 (see Nacha’s rules on unauthorized return reasons). Our article on Should I stop paying my MCA? How to revoke ACH authorization covers the mechanics.
Is it considered a default if I miss one MCA payment?
Not necessarily. It depends on the contract. This contract from Cobalt Funding filed with the SEC is in default when “either two consecutive or four total ACH debits” are returned for insufficient funds. Blocking the account or changing bank accounts without their consent is also a default.
If you have an MCA that debits daily, you could be in default by the second day. If it debits weekly, it would take about two weeks.
The agreement for Pawn Funding, also filed with the SEC, makes it an Event of Default if you block the debit “without providing any advance written notice,” and an R08, R10 or R29 bounce counts only if you do not explain it within two business days. That is why the 5 letters to send before you stop paying matter.
How much can the funder claim once you’re in default?
Usually, they can demand the entire purchased amount that you haven’t paid as well as other fees. Using Cobalt’s terms, here is the math if you have $60,000 left to pay.
| What they can claim | What the Cobalt contract says | With $60,000 left to pay |
|---|
| The uncollected purchased amount | It will become immediately due in full | $60,000 |
| Fee for blocking the account or being in default | $2,500.00 flat fee | $2,500 |
| “Reasonable Damages” | 40% of the outstanding amount or $5,000.00, whichever is greater | $24,000 |
| Total they can claim | Before attorney fees and before adding 16% per annum on the default amounts | $86,500 |
These amounts come from one real contract. Other contracts differ, and a court may award far less after arguments like reconciliation and loan vs. sale.
What happens if I stop paying my MCA during days 7 to 14?
You will receive a written notice of default or demand letter, calls to you and the personal guarantor will continue, and they may send notices to your customers and processor, but without a valid confession of judgment, a court judgment is unlikely yet.
Notices to your customers are authorized under UCC 9-406 and can come this early because the UCC-1 is typically filed the day you are funded. Customers are entitled to see “reasonable proof that the assignment has been made” before paying the funder.
The confession of judgment may be relevant at this stage if:
- You live in New York State: CPLR 3218 limits filing to the county where you reside as set forth in your affidavit, so a confession of judgment cannot be filed there if you live elsewhere.
- You live in Texas: Texas voids confessions of judgment in sales-based financing contracts as of September 1, 2025, and since that date a funder cannot set up debits unless they have a first priority perfected security interest in the account.
- You live in Pennsylvania: Pennsylvania still enforces confessions of judgment in commercial transactions, but you can petition to have the judgment stricken or opened within 30 days of being served with notice under Pa.R.C.P. 2959(a)(3).
Without a usable confession of judgment, the funder must obtain a judgment before it can serve a restraining notice freezing your New York bank account under CPLR 5222. A New York funder anxious to sue may file under CPLR 3213, and you will have 20 days from personal delivery to respond, or 30 days from completion of service under certain methods listed in CPLR 320.
Several recent Second Department cases in New York hold that a merchant who never requested reconciliation cannot argue the contract is illusory, so be careful about what you put in writing!
Frequently Asked Questions
Can the MCA funder freeze my bank account in the first week?
In most cases, no. Without a valid confession of judgment, they must sue you and win before serving a restraining notice in New York under CPLR 5222. The exceptions are a Pennsylvania commercial confession of judgment or a New York one filed in your county.
Will the MCA funder contact my customers and processor right away?
They can, because they typically file their UCC-1 at funding, but your customers do not have to pay the funder until they receive an authenticated notice under UCC 9-406, and they can ignore a notice for less than the full installment amount.
Do debt collection laws apply to MCA collectors?
Not in most cases. The FDCPA only applies to consumer debt, not business debt. In California, however, the Rosenthal Act now applies to a natural person who owes up to $500,000.00 to a single creditor for commercial financing “entered into, renewed, sold, or assigned on or after July 1, 2025.”
Can the MCA funder call or sue my personal guarantor right away?
The funder may call your personal guarantor within a day or two of the first bounced payment and can sue on the same time frame as suing you, but read the exact wording of your personal guaranty, because it may not be enforceable!