Merchant Cash Advances (MCAs), one of the popular alternative financing options, often turn out to be quite favorable for small to medium-sized businesses, that are not eligible for traditional bank loans. Before opting for an MCA, the needy always researches and gathers information about its benefits, application and disbursement process, repayment frequency, time frame, etc. But, it is extremely crucial to gain thorough knowledge about the possible consequences of defaulting on an MCA agreement, as well.

Small business lenders usually include a provision termed ‘Confession of Judgement (COJ)’ or make the borrowers sign a personal guarantee. Technically, a COJ is an agreement between the MCA provider and the borrower, which states that the borrower has accepted the liability for the cash advance and waived all legal defenses, in the case of a default. Using a COJ clause, the financer can avoid a tedious legal proceeding and quickly recover the lent funds by filing a judgment with the court. If the borrower fails to repay, the MCA provider has the power to obtain a judgment without presenting evidence to the court, as the borrower has already waived off his/her legal rights, while making the contract. Hence, by signing a COJ, the borrower loses all rights to defend him, in the case of any default. Once a COJ is filed, the court will notify the defaulted borrower about the judgment entered and also inform him/her that the MCA provider is now permitted to start levying business accounts and seizing business assets. In a nutshell, an MCA provider uses a COJ to reduce its risk and make sure he/she recovers the lent money anyhow. Also, this agreement prevents a borrower from getting access to additional cash advances, which could imperil future sales and increase the risk of default.

MCAs are not typical business loans. In the case of MCAs, a lump sum amount is provided to the borrower in return for a portion of his future daily/weekly business revenue. Hence, these are not governed by usury or other laws that are generally applied to traditional business loans. If the borrower defaults on the MCA, a breach of contract might take place and a lawsuit might be filed against him/her by the MCA provider. To avert the problem, the borrower needs to make sure he/she doesn’t face difficulties in repaying the cash advance throughout the repayment tenure by implanting a possibility of modifying the repayment plan in the future when needed. This is only possible when the MCA includes a reconciliation clause. Therefore, it is always advisable to speak with an attorney to check if they can change the percentage of the MCA agreement and lower the repayment amount. Also, there is cash advance relief service providing firms, that comprise experienced attorneys, who meticulously review the MCA agreement, analyze the borrower’s financial situation, work with him/her to make sure the business is running, and protect his/her personal assets by negotiating an alteration in the percentage.

      COJ-Permitted States:

      The Federal Trade Commission (FTC) has put a ban on COJs for consumer contracts, but not for commercial contracts. Multiple states are putting efforts to regulate COJs, but not all are able to protect their residents from confessed judgements entered in other states. Michigan, Illinois, Maryland, Minnesota, New Jersey, Ohio, Pennsylvania, Texas and Virginia are the states where COJs are permitted.

      Finance Providers That Use COJs:

      • Equipment Financing Companies Equipment financing companies use COJs to quickly retrieve pieces of equipment, in the case of a default.
      • MCA Providers MCA providers often use COJs to avert the legal fees that could surpass the original advance amount.
      • Commercial Landlords COJs allow a commercial landlord to immediately evict the defaulter from the property.

      How COJs Work:

      The borrower needs to sign a COJ at the beginning of the lending process. If the borrower violates the terms at any point, the lender can go to their local courthouse and file a judgement against him/her without a trial, by using COJ. When a business signs a COJ as an entity, the lender can only acquire the business’s assets to recover the money. But, if an individual business owner signs a COJ or guarantees the small business loan, personally, the lender can seize personal assets. When borrowers sign COJs with their own names, a risk of losing their businesses or belongings or both prevails, in the case of defaults.

      Tips To Lessen The Damage Of A COJ After A Judgement Is Filed:

      • After a judgement is filed against a defaulter, he/she can file a motion to appeal the court’s ruling, if the lender did not follow proper procedures. The judgement against the defaulter can be turned into a ‘vacated judgement’ once his/her appeal gets successful. 
      • If the court doesn’t have specific information while reporting the defaulter’s judgment to the credit bureaus, the judgment might get removed from the defaulter’s credit file. In such a case, the defaulter requires to dispute inaccuracies like clerical errors or prove that he/she had paid the debt to the lender.
      • Sometimes, paying the outstanding amount lessens the impact of the judgement.