What's the impact of a personal guarantee on an MCA?

Full answer

What an MCA personal guarantee is. A personal guarantee (PG) is a separate contractual promise by the business owner (or owners with 20%+ equity) to repay the MCA obligation personally if the business fails to pay. Even though the MCA contract is between the funder and the business, the PG creates a parallel obligation against the individual owner. In default, the funder can sue both the business AND the owner personally.

Why nearly all MCAs require PGs. MCAs are structured as purchases of receivables, but the receivables themselves disappear if the business closes. The PG is the funder's protection against business closure — they can still collect from the owner personally even if the business has no remaining assets. Without a PG, MCA pricing would be materially higher (or the product wouldn't exist at this risk profile). Some larger / older businesses can negotiate PG-free or capped-PG deals, but standard SMB MCAs always include a full PG.

What a PG covers (the scope). Standard MCA PGs cover: (1) the full unpaid balance of the advance, (2) accrued factor up to the date of default, (3) collection costs (attorney fees, court costs, collection agency fees), (4) default fees and acceleration amounts under the contract, (5) interest on the unpaid balance post-judgment. On a $50K advance at factor 1.35 with $30K unpaid at default, the PG exposure can easily reach $50K-$70K once fees and post-judgment interest are added.

Default trigger and PG enforcement timeline. Typical default triggers: 1-2 consecutive missed remits, NSF on the ACH, closing the merchant processing account, stacking without consent, voluntary business closure, or filing for bankruptcy. Once default is declared: (1) acceleration (full balance immediately due), (2) ACH attempts continue to drain available funds, (3) within 30-60 days, the funder typically sues both the business and the personal guarantor, (4) judgment is sought within 60-180 days depending on jurisdiction, (5) post-judgment collection efforts begin (bank levy, wage garnishment, asset attachment).

Impact on personal assets. Once the funder has a personal judgment against you, they can pursue: (a) Bank account levies — funds in personal bank accounts can be frozen and seized (varies by state; some states protect certain accounts). (b) Wage garnishment — federal law caps wage garnishment at 25% of disposable income or 30x federal minimum wage, whichever is less. Some states (TX, FL, NC, SC, PA) prohibit wage garnishment for most debts entirely. (c) Real estate liens — judgment liens attach to your home; some states have homestead exemptions that protect primary residence value up to a cap (FL has unlimited homestead, TX up to 10 acres urban or 200 acres rural; other states $25K-$500K). (d) Vehicle liens — similar to real estate with state-specific exemptions. (e) Retirement accounts — generally protected from creditors under ERISA (employer 401k) and many state laws (IRAs).

Impact on personal credit. PG enforcement typically shows on personal credit reports as a 'judgment' (in states where civil judgments are still reported — fewer than they used to be after 2017 reporting changes) and as a 'collection account' if the debt is sold to a collector. The credit score impact is severe (50-150 point drop) and can persist 7+ years. Some MCA funders report ongoing payment performance to commercial credit bureaus (D&B, Experian Business) but rarely to personal credit bureaus unless default occurs.

Spousal exclusion strategies. The PG language sometimes captures spousal assets in community property states (CA, TX, AZ, NV, WA, NM, ID, LA, WI). To protect spousal assets: (1) Negotiate single-spouse PG (only the majority owner signs). (2) Confirm the contract doesn't include 'spousal joinder' language. (3) Title assets separately from the guarantor. (4) Maintain separate bank accounts. (5) Get state-specific legal advice if you're in a community property state with significant spousal-owned assets.

Cap negotiation strategies (when funders will negotiate). PGs are usually non-negotiable on first MCA deals from standard funders. They become more negotiable in these scenarios: (1) Multi-deal renewals with clean payment history. (2) Larger deal sizes ($250K+) where the funder is more flexible. (3) Multiple-owner businesses where each owner can offer a percentage-cap PG (e.g., 50/50 cap on a deal with two 50% owners). (4) Asset-rich businesses where the funder accepts substitute collateral (real estate, equipment lien) in exchange for capped or eliminated PG. (5) Sophisticated borrowers with prior PG-negotiated deals (track record of negotiation).

Burn-down provisions. A burn-down PG reduces over time as the business pays down the advance. Example structure: 100% PG at funding, 75% after 50% of advance is repaid, 50% after 75% repaid, 25% in the final 25% of repayment. This is rare on standard MCA deals but possible on larger deals or with motivated funders trying to win business.

Five negotiation moves to reduce PG exposure. (1) Ask for a cap (limit PG to 50% of unpaid balance vs full amount). (2) Ask for spousal exclusion (single-spouse PG only). (3) Ask for burn-down (reduces over time). (4) Ask for asset substitution (real estate or equipment lien in lieu of full PG). (5) Ask for a sunset clause (PG expires after X months of clean payment). Don't expect all 5 to be granted, but asking surfaces the funder's flexibility. Get all concessions in writing in the contract, not as verbal promises.

When NOT to sign a PG. (1) The PG covers obligations beyond the MCA itself (cross-collateralization with other funder products you didn't agree to). (2) The PG is enforceable across multiple advances 'now or in the future' (it should be tied to THIS specific advance). (3) The PG includes a confession-of-judgment clause that lets the funder file judgment without notice. (4) The PG includes attorney-in-fact language giving the funder power to act on your behalf. (5) The contract terms are otherwise so unfavorable that a PG-required deal isn't worth taking — there are 100+ funders, walk away.

If you're sued on a PG. (1) Don't ignore the lawsuit — failure to respond results in default judgment. (2) Hire an MCA-experienced commercial litigation attorney within 14 days. (3) Review the underlying contract for defenses (confession-of-judgment issues in NY, usury violations in some states, unconscionability arguments, contract breach by funder). (4) Consider settlement negotiation — funders often accept 40-70% of claimed amount in lump-sum settlement to avoid litigation costs. (5) If personal bankruptcy becomes necessary, the PG obligation is generally dischargeable in Chapter 7 (unlike the underlying MCA in some states), but consult bankruptcy counsel for specific case.

Bottom line: PGs are real liability that follows you personally if the business fails. Treat MCA decisions like personal financial decisions, not just business decisions. Negotiate cap and exclusion provisions where possible, document everything in writing, and never sign a PG on a deal you're not confident you can repay.

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