An MCA funder can absolutely sue you. The path runs through default, the personal guarantee, and (on contracts that include one) the Confession of Judgment. Below: the realistic sequence, what can be enforced, and the off-ramps along the way.
The legal sequence in order
- Missed daily debits. Three returns in 7 days triggers a collections call. Five missed payments in 30 days or seven consecutive days of misses meets most contracts' default trigger.
- Default declared. The funder issues a notice of default. This is paperwork, not a lawsuit yet.
- Workout window. Most funders try to negotiate a settlement or payment plan first. This is the time to call. Settlements typically land at 50-75% of the remaining balance.
- Confession of Judgment filed (if contract includes one). Some MCA contracts include a COJ — you pre-agreed in the contract that the funder can obtain a court judgment without a hearing. New York state outlawed out-of-state COJs in 2019; some other states still permit them.
- Lawsuit filed (if no COJ). Without a COJ, the funder has to file a normal civil suit. This is slower (months), more expensive for the funder, and gives you a chance to contest.
- Judgment obtained. Either via COJ or via standard litigation. Once the funder has a judgment, recovery options open.
- Recovery actions. Bank account levy, wage garnishment (subject to state limits), liens against personal property.
What the funder can actually recover
Once a judgment is in place, the funder's collection toolkit includes:
- Bank account levy. One-time freeze and seizure of funds in personal bank accounts, up to the judgment amount.
- Wage garnishment. Federal law caps at 25% of disposable income; many states cap lower.
- Property liens. Lien against real estate you own, blocking sale or refinance until the lien is satisfied.
- UCC-1 enforcement. The lien on business assets becomes actionable.
What the funder generally cannot easily reach: retirement accounts (ERISA-protected), Social Security benefits, your spouse's income (in non-community-property states), homestead exemption portion of your primary residence (varies by state).
The personal guarantee as the lawsuit vehicle
Almost every MCA suit runs on the personal guarantee. The funder isn't suing the LLC because the LLC has no assets — they're suing YOU as the guarantor. The personal guarantee is what makes the suit personal rather than against an asset-less entity.
This is also why the personal guarantee is the most important clause in the contract. Read it before signing.
Off-ramps before the lawsuit lands
Three points in the sequence where the lawsuit can be averted:
- Before the third missed payment. Call the funder's collections desk. Ask about workout options. Reconciliation, daily-payment reduction, switching to weekly debits — funders prefer these over collection.
- After default declared, before COJ filed. Settlement negotiation. 50-75% lump-sum payoff is common.
- After COJ filed, before levy. If you act fast, a debt-settlement attorney can sometimes vacate the judgment or negotiate a payment plan that prevents bank account seizure.
When the funder has weaker grounds
Several MCA suits in the past 5 years have been dismissed or settled when courts recharacterized the underlying advance as a usurious loan rather than a true purchase of receivables. The legal test usually examines: (1) was repayment contingent on the merchant's actual revenue, (2) did the funder have recourse beyond the receivables, (3) what was the effective annualized cost.
Contracts where repayment is fixed regardless of revenue, where the funder has full recourse via personal guarantee + UCC, and where the implied APR exceeds 100% — those are the contracts most likely to be challenged successfully. If you're in this situation and being sued, talk to an attorney before settling.
How to avoid the lawsuit entirely
- Size the advance correctly to your cash flow.
- Avoid stacking unless you're consolidating.
- If a slow week is coming, call the funder before the miss, not after.
- Use the reconciliation provision in your contract during slow months.
- If you can't pay, negotiate a settlement — don't ghost the funder.
Almost all MCA lawsuits trace back to one of two situations: (1) the advance was too big for the cash flow and the merchant couldn't pay, or (2) the merchant stopped communicating after misses started. Both are avoidable.
Sources & References
- Bank denial and small business credit access figures cited in this piece are derived from the Federal Reserve Small Business Credit Survey. Approval rates for small business credit applications at large banks have ranged from approximately 13%-31% across recent survey years, depending on bank category and reporting period.
- Small business finance landscape and lending program data: SBA Office of Advocacy.
- Merchant cash advance industry standards and disclosure practices: Small Business Finance Association (SBFA).
- Commercial financing disclosure regulations referenced (NY FAIR Act, CA SB 1235/666/362, VA, UT) are summarized from the published statutes; consult counsel for specific compliance application.