Default Can Happen Without Missing a Payment
The default provisions in most MCA agreements extend far beyond missed payments. Opening a second bank account, allowing another creditor to file a UCC lien, applying for additional financing without written permission, experiencing a significant revenue decline, and in some agreements, changing your business address without notifying the funder can each trigger default. These provisions exist not to protect the funder against genuine credit deterioration but to create maximum leverage at any point the funder chooses to exercise it.
The concept of “technical default” is not incidental to MCA practice. It is architectural. A funder who wants to accelerate the obligation or demand immediate repayment needs a trigger. Technical default provisions provide many triggers that have nothing to do with the business owner’s willingness or ability to pay.
Default Fees Compound the Original Obligation
When default is declared, most MCA agreements impose additional fees: default charges, legal fees, collection costs, and sometimes an acceleration of the entire remaining balance. These fees are added to the already-inflated obligation that the factor rate created. A business that owed a remaining balance and then defaulted may find the total demand significantly higher than the balance it expected to pay.
Courts have scrutinized these default fees with growing skepticism. In Specialty Capital LLC v. Hall Academy of Child Growth and Development LLC, the court examined whether MCA default fees constituted valid liquidated damages or unenforceable penalties. The distinction matters: liquidated damages must represent a genuine pre-estimate of actual loss. A fee that bears no relationship to the funder’s actual cost of default is an unenforceable penalty.
A fee designed to punish is not a fee designed to compensate. Courts know the difference, even when the contract does not acknowledge it.
The Effective Rate After Default Often Exceeds Any Statutory Limit
The factor rate on an MCA already produces an effective annual percentage rate that, in many agreements, exceeds state usury thresholds. When default fees, acceleration, and collection costs are added, the total cost of the advance expressed as an annual rate can reach figures that no court would enforce if they were disclosed as such. The funder’s ability to stack default charges onto an already high-cost obligation is one reason why recharacterization arguments have gained traction.
Penalty Fees Are Increasingly Held Unenforceable
The attorney general actions against Yellowstone Capital and other funders in 2024 and 2025 specifically cited fee structures that bore no relationship to actual costs or losses. The legal framework for challenging default fees as unenforceable penalties — rather than valid liquidated damages — has become more accessible as courts have seen more MCA disputes. This is not a fringe argument. It is an argument that has succeeded and continues to succeed in jurisdictions across the country.
Stacking Defaults Create Impossible Situations
When a business carries multiple MCA obligations and one funder declares default, the default provisions in the other agreements are often triggered automatically by the existence of a legal claim against the business. A single default cascades into simultaneous defaults across the entire MCA stack, and the combined demand can exceed the business’s total asset value. This is not an accident of poor contract drafting. It is a feature that ensures maximum leverage and, from the business owner’s perspective, a situation that seems to have no exit.
Bankruptcy’s automatic stay is precisely the mechanism that addresses stacked defaults. All collection stops simultaneously, not just from one funder but from every creditor, creating a single organized resolution process instead of a multi-front siege.
Negotiation Before Default Is Usually More Productive Than After
Default transforms the commercial relationship into an adversarial one, and the leverage shifts significantly. Before default, the business owner has something the funder wants: continued performance. After default, the funder’s incentive to negotiate is lower because the remedies are already available. Approaching a modification or settlement before the first missed payment, or before a technical default is declared, produces better outcomes in most situations.
Consultation is where the assessment of that window — whether it is still open and what can be done with it — begins.
