A merchant cash advance is not a loan. That distinction matters enormously when a restaurant closes.
A traditional bank loan is governed by lending laws, has a fixed interest rate, and can be discharged in bankruptcy under certain conditions. A merchant cash advance is structured as a purchase of future receivables -- the MCA provider bought a portion of your future credit card sales at a discount, and you agreed to repay it through daily or weekly ACH debits from your business bank account. That structure gives MCA providers tools that banks do not have.
This guide covers what actually happens to MCA obligations when a restaurant closes, what the provider can and cannot do, and what options exist for owners who are underwater on MCA debt.
How MCA Works and Why It's Dangerous
The mechanics of a merchant cash advance are straightforward: you receive a lump sum (say, $50,000), and the provider takes a fixed percentage of your daily credit card receipts until they have collected a predetermined amount (say, $72,500 -- a 1.45 factor rate). The daily pull continues until the advance is paid in full.
The problem is that the factor rate is not an interest rate. A 1.45 factor on a 6-month advance translates to an annualized APR of roughly 90 percent. On a 3-month advance, it can exceed 150 percent. The Federal Trade Commission has documented cases where MCA providers used deceptive practices to trap small businesses in cycles of advances.
Restaurant owners take MCAs because they are fast (funded in 24-48 hours), require no collateral, and do not depend on a strong credit score. They are also taken when the business is already in distress -- which is exactly when the daily pull becomes unsustainable.
What Happens When You Close and Stop Making Payments
When a restaurant closes and the bank account goes to zero, the MCA provider's daily ACH pulls will fail. What happens next depends on the specific contract terms, but the typical sequence is:
Day 1-3: Failed ACH attempts. The provider's system will retry the pull, often multiple times, generating NSF fees from your bank.
Day 3-7: The provider contacts you directly. Most MCA contracts include a provision that if ACH pulls fail for a specified number of consecutive days, the full remaining balance becomes immediately due.
Day 7-30: The provider may attempt to collect through other means. If your contract included a confession of judgment (COJ) clause -- which many MCA contracts do -- the provider can obtain a court judgment against you without filing a lawsuit or giving you an opportunity to respond. They simply file the signed confession with a court clerk.
Day 30+: With a judgment in hand, the provider can garnish your personal bank accounts, place liens on personal property, and in some states, garnish wages. The business entity provides no protection if you personally guaranteed the advance.
The Confession of Judgment Problem
The confession of judgment is the most dangerous element of MCA contracts. Several states -- including New York, where many MCA providers are incorporated -- allow COJ clauses that let a creditor obtain a judgment without a trial. You signed the confession when you signed the MCA agreement, often buried in the contract language.
The New York legislature restricted COJ clauses for out-of-state borrowers in 2019, but the practice continues in other forms and in other states. If your MCA contract was governed by New York law and you are an out-of-state borrower, the restriction may apply. If you are a New York business, or if the contract specifies another state's law, it may not.
The practical effect: an MCA provider with a COJ can move from failed ACH pull to frozen personal bank account in a matter of days, without you having any opportunity to contest the debt in court.
Does Closing the Business Stop the MCA?
No. Closing the restaurant does not extinguish the MCA obligation. The advance was made to the business entity, but if you personally guaranteed it -- which most MCA agreements require -- the obligation follows you personally.
The MCA provider's claim is against the future receivables they purchased. When the business closes and there are no future receivables, the provider's position is that the full remaining balance is due immediately. They will pursue that balance through the personal guarantee.
Can MCA Debt Be Discharged in Bankruptcy?
This is where the "purchase of receivables" structure creates a significant problem. MCA providers argue that because the advance is structured as a purchase, not a loan, it is not subject to bankruptcy's automatic stay. Courts have been inconsistent on this question.
Some bankruptcy courts have found that MCAs are functionally loans and subject to the automatic stay. Others have agreed with the providers that the purchase structure takes the advance outside of bankruptcy protection. The outcome depends heavily on the specific contract language, the jurisdiction, and the judge.
If you are considering bankruptcy as a way to address MCA debt, you need an attorney who has handled MCA cases specifically -- not just a general bankruptcy attorney. The analysis is fact-specific and the outcomes vary significantly.
What Options Exist for Restaurant Owners with MCA Debt
Option 1: Negotiate a settlement. MCA providers are often willing to settle for less than the full balance, particularly when the business has closed and collection is uncertain. A settlement of 40 to 60 cents on the dollar is common when the provider believes the alternative is a long collection process against a closed business. You need to negotiate before the provider obtains a judgment -- after that, their leverage increases significantly.
Option 2: Challenge the confession of judgment. If your contract included a COJ and the provider has already filed it, you may be able to challenge it on procedural grounds. This requires an attorney and is not guaranteed to succeed, but it can buy time and create leverage for a settlement.
Option 3: Consult a bankruptcy attorney about the specific MCA structure. Even if the MCA is not dischargeable, a bankruptcy filing can create breathing room and may affect the provider's collection options. The analysis depends on your specific contract and jurisdiction.
Option 4: Do nothing and wait for the statute of limitations. This is not a strategy -- it is the absence of one. The provider will obtain a judgment, and judgments can be renewed. This approach leaves you exposed indefinitely.
The Stacking Problem
Many restaurant owners in distress have multiple MCAs from different providers -- a practice called stacking. Each advance was taken to cover the daily pull from the previous one. When the restaurant closes, all of them accelerate simultaneously.
If you have stacked MCAs, the total obligation can be two to three times what you think it is once factor rates are applied to each advance. The Closing Cost Calculator can help you map out the total exposure before you make any decisions about how to proceed.
What to Do Right Now
If your restaurant is closing and you have MCA debt, the sequence matters:
First, do not let the bank account go to zero without a plan. The failed ACH pull triggers the acceleration clause and starts the COJ clock. If you know you are closing, contact the MCA provider before the pulls start failing. Providers are more willing to negotiate before default than after.
Second, pull every MCA contract and read the COJ clause, the acceleration clause, and the personal guarantee language. You need to know exactly what each provider can do and when.
Third, get a clear picture of your total MCA exposure relative to your available assets. The gap between what you owe and what you can pay determines whether a negotiated settlement is realistic or whether you need to consult a bankruptcy attorney.
The diagnostic session with Rod is a 50-minute conversation that covers your specific situation -- including MCA obligations, lease exposure, and personal guarantee risk. Most owners leave with a clearer picture of their total exposure and a realistic sequence for addressing it.
Related guides: Who Pays Restaurant Debts When It Closes | Does Closing a Restaurant Affect Your Credit | Personal Guarantee on a Restaurant Lease