Does closing your business mean you default on your Merchant Cash Advance? Some MCA contracts state that the merchant going out of business is not a default, but it depends on how you close your business.
If you google “what happens to my MCA if I close my business” you’ll get many responses stating that going out of business typically causes a default and you will owe the remaining balance. That is true for some MCAs, but not all, as two 2026 appellate cases in New York demonstrated.
Does closing your business end the MCA purchase obligation?
If the MCA is a real sale, and the business is closing honestly, the purchase obligation can end with the business. The MCA funder claims it purchased the merchant’s future receivables, and once sold, the merchant has no further legal or equitable interest in them (see New York UCC Section 9-318(a)). Section 14 of the Cedar Advance MCA agreement, filed with the SEC, states that a merchant “going bankrupt, going out of business, or experiencing a slowdown in business or a delay in collecting Receivables will not on its own without anything more be considered a breach of this Agreement.”
In NewCo (4th Dept., June 26, 2026, 2026 NY Slip Op 04057), the court relied on similar language to find the agreements were sales. Conversely, in People v Richmond Capital Group, 246 AD3d 585 (1st Dept., Feb. 19, 2026), the agreements made it a breach to “interrupt, suspend, dissolve or terminate” the business, and the court determined that the MCAs were loans. Recourse if the merchant closes or goes bankrupt is one of three factors courts weigh, along with real reconciliation and a finite term.
If the receivables cease to exist because the merchant closed in good faith, that is a risk a true-sale funder has to take. It can still collect receivables already generated, such as the final batches or open invoices.
How can closing your business lead to a default on your MCA?
The problem for merchants is the “without anything more” language in the MCA. Normal shutdown steps can violate other covenants. Under the Cedar Advance MCA agreement, you could be in breach if you:
- Change card processors or bank accounts without the funder’s written consent (Section 23).
- Move or rename the business without prior written notice (Section 24).
- Block an ACH debit without advance notice, or intentionally prevent the funder from collecting (Sections 30.2 and 30.3).
- Do not explain a stop payment or returned ACH debit within two business days (Section 30.4).
Under Section 31, on default the funder can add twenty-five percent of the remaining unpaid balance as liquidated damages. Be sure to provide notice to the funder before these steps.
How can a merchant wind down their business with an MCA?
Wind down in an orderly manner. First, since revenue will be going down, request a reconciliation in writing. Under the Cedar agreement, ACH debits are halted until the funder completes the reconciliation within two business days, and the remittance should drop to the agreed percentage of actual receipts. Under the agreement at issue in NewCo, failing to request a reconciliation within one business day of an NSF return was a default.
Next, follow the order set by the entity law that governs your business. Under New York LLC Law Section 703, those winding up can settle and close its business, sell its property and discharge its liabilities. Section 704 puts creditors first in distributions. Under Section 18-804 of the Delaware Limited Liability Company Act, creditors are also paid first, with a reserve for claims that are reasonably likely to arise within 10 years.
If the funder has a UCC-1 on your equipment and you default, the funder can sell it in a commercially reasonable manner under UCC 9-610. Under UCC 9-615, if the advance was a loan, you get any surplus and owe any deficiency. If it was a sale of accounts, you get no surplus and owe no deficiency.
Under BCL 1007, a dissolving New York corporation can publish and mail a notice setting a claims deadline at least 6 months after first publication. Late claims are barred unless a court excuses the delay.
What is an assignment for the benefit of creditors?
An assignment for the benefit of creditors (“ABC”) is a state-law alternative to Chapter 7 in which you assign all your assets to an assignee, who liquidates them and pays creditors by priority. In New York, the assignment must be in writing, acknowledged and recorded with the County Clerk under DCL 3. You then have 20 days to file a schedule of your creditors and a complete inventory under DCL 4. Claims not presented within one year of recording cannot be allowed under DCL 15. Employee wages get priority up to $1,000 each, followed by cash deposits up to $300, under DCL 22.
The assignee can bring an action to claw back transfers you made within 4 months before the assignment to pay older debts. That works better if the MCA is really a loan, since a true-sale funder would argue the money was its own all along. In California, the lookback period is 90 days, and 1 year for insiders, under CCP 1800. Neither an ABC nor Chapter 7 discharges an LLC or corporation; under 11 U.S.C. § 727(a)(1), only an individual gets a bankruptcy discharge.
What about your personal guaranty after closing?
Any personal guaranty you signed is a separate and distinct obligation. Closing or dissolving the company will not release it. See our discussion on personal liability when you close the business.
Frequently Asked Questions
Is closing my business a default on my MCA?
Not necessarily. Many MCAs, structured as true sales, have provisions that going out of business will not constitute a breach of the contract. However, if you change your bank, prevent ACH debits, or move without proper notice, you may be in default.
Should I request a reconciliation before shutting down?
It may be helpful. A written request for reconciliation will ask the funder to reduce your payments to the agreed-upon percentage of your decreasing receipts. It also helps if the funder later claims your MCA was a loan.
Does dissolving my LLC make the MCA go away?
No. Dissolving your LLC merely initiates the process for winding down your business and paying your creditors first. Keep in mind, you may have signed a personal guaranty.
Can an ABC assignee claw back MCA payments?
In some cases. In New York, the assignee can sue to claw back transfers you made within 4 months before the assignment to pay antecedent debt. In California, the lookback period is 90 days, and 1 year for insiders.