When you signed a merchant cash advance agreement, the funder almost certainly required you to sign a personal guaranty. Now the business is struggling or closed, and the funder is coming after your personal assets — your home, your bank accounts, everything. But the personal guaranty may not mean what the funder claims it means.
Most MCA personal guarantees are limited in scope, and there are powerful legal defenses that can reduce or eliminate your personal exposure.
What an MCA Personal Guaranty Actually Covers
Read the language carefully. Most MCA personal guarantees do not guarantee the full "purchased amount." Instead, they guarantee specific, limited obligations:
Typical Guaranty Coverage
- Truthfulness of information: You guaranteed that the information you provided in the application was accurate
- Covenant compliance: You guaranteed that the business would comply with the covenants in the agreement (like maintaining a bank account, not taking on additional debt without notice, etc.)
- Cooperation: You guaranteed that you would cooperate with the funder's reasonable requests
- Collection costs: You guaranteed to cover the funder's costs of collecting actual receivables that were diverted or withheld
What the Guaranty Does NOT Cover
- The full purchased amount: The guaranty typically does not make you personally responsible for the total payback figure
- Creating receivables: You are not required to generate revenue so the funder can collect
- Converting the MCA to a loan: A personal guaranty cannot create loan-like liability where the contract itself says none exists
This is a critical distinction. Many MCA funders demand the full "balance owed" from the guarantor after a business closes. But if the contract says business closure is not a breach, and the guaranty only covers specific performance obligations, the guarantor's exposure may be minimal or zero.
The Business Closure Defense
This is the strongest defense for personal guarantors. If your business is closed:
- No future receivables: The business generates no revenue, so there are no receivables for the funder to purchase
- No breach: The MCA contract itself states that "going out of business does not constitute a breach"
- No acceleration: If there is no breach, the funder cannot accelerate the balance or demand the full purchased amount
- No guarantor liability: If the underlying obligation is zero (no receivables to purchase), the guaranty covers nothing
A personal guaranty is only as strong as the underlying obligation. If the MCA contract expressly says business failure is the funder's risk, the guarantor cannot be held liable for a risk the funder agreed to bear.
When the Funder Overreaches
If the funder is pursuing you personally for the full purchased amount, they are implicitly treating the MCA as a loan. This creates a fatal legal problem for them:
The Loan Recharacterization Trap
By demanding personal payment of the full balance regardless of business receivables, the funder is conceding that the contract is actually a loan — not a sale of future receivables. And if it is a loan:
- The effective interest rate (often 100%+ APR) is criminally usurious
- Under New York law, criminal usury voids the entire contract
- Under Texas law, the funder forfeits all interest and potentially all principal
- The guaranty is void because the underlying contract is void
The funder cannot have it both ways. They cannot claim "it's a sale, not a loan" to avoid usury laws while simultaneously demanding full repayment from the guarantor like a loan.
Defending Against Guaranty Collection
Step 1: Review the Guaranty Language
Read every word. Identify exactly what obligations you guaranteed. If the guaranty is limited to specific covenants rather than the full purchased amount, you have a strong defense.
Step 2: Assess Whether a Breach Occurred
Did you actually violate any covenant you guaranteed? If the business simply ran out of money and closed — which the contract says is not a breach — there may be no triggering event for guaranty liability.
Step 3: Raise Usury as a Personal Defense
If you are an individual (not a corporation), you can assert usury defenses in your personal capacity. In New York, the civil usury cap of 16% applies to individuals (the corporate exemption only protects the corporate borrower, not the individual guarantor in many cases).
Step 4: Challenge Jurisdiction
If the funder sues you personally in New York, challenge whether New York has personal jurisdiction over you as a Texas individual. Your only connection to New York may be signing a form — which may not be sufficient for jurisdiction, especially given HB 700's policy against out-of-state forum selection in commercial financing.
Step 5: Consider Personal Bankruptcy
If the MCA funder has obtained a judgment against you personally and is pursuing your assets:
- Chapter 7: Can discharge the personal guaranty obligation entirely. Texas's generous exemptions protect your homestead, retirement accounts, and significant personal property
- Chapter 13: Can restructure the guaranty obligation into affordable payments over 3-5 years
Even the threat of personal bankruptcy can drive settlement, because MCA funders know that a discharged guarantee means they collect nothing from the guarantor.
Settlement Leverage as Guarantor
Personal guarantors have more leverage than they realize:
- The MCA funder wants money, not a judgment: They would rather settle for something than litigate for years and potentially lose on usury grounds
- Bankruptcy threat: If you file, the funder likely gets nothing from you personally
- Litigation cost: Pursuing a guarantor in Texas is expensive for a funder based in New York
- Multiple defenses: You can raise usury, limited guaranty scope, business closure, and due process simultaneously
Typical Settlement Structures
- Lump sum: 20-40% of the claimed amount, in exchange for full release of the guaranty
- Payment plan: Monthly payments of an affordable amount over 12-24 months
- Guaranty release: The funder releases the personal guaranty in exchange for a consent judgment against the business entity (which may be judgment-proof)
- Mutual release: Both sides release all claims with no further payment
Protecting Your Personal Assets
While defending against the guaranty claim:
- Do not transfer assets: Moving assets to hide them from creditors can constitute fraudulent transfer, which creates additional liability
- Know your Texas exemptions: Texas protects your homestead (unlimited value), retirement accounts, and significant personal property from judgment creditors
- Separate personal and business finances: If you have not already, ensure your personal accounts are separate from business accounts being targeted
- Consult both a litigation attorney and a bankruptcy attorney: Understand all your options before making decisions
This article is part of the MCA Defense Guide. Call (469) 607-8552 for a free consultation.