Can a Merchant Cash Advance Guarantor Be Personally Liable After the Business Closes?

When a business operating under a merchant cash advance agreement closes, the funder will often pursue the individual owner under a personal guaranty. However, the closure of the business does not necessarily mean that the guarantor automatically owes the entire alleged balance.

The first questions should be:

1. What obligations did the guarantor actually guarantee?
2. Did the merchant breach the agreement?
3. Does the agreement state that an ordinary business failure or closure is not a default?
4. Is the funder seeking repayment of purchased receivables—or repayment of a fixed debt regardless of whether the receivables ever exist?

Depending on the language of the agreement and the circumstances surrounding the closure, a guarantor may have a substantial argument against personal liability.

A Guaranty Is Defined by Its Language

A personal guaranty must be read together with the underlying merchant cash advance agreement. Some guaranties cover only the merchant’s performance of specified contractual obligations. Others purport to impose broader and potentially unconditional repayment liability.

That distinction matters.

If the guarantor promised only to answer for the merchant’s breach, the funder ordinarily must first establish that the merchant actually breached the agreement. If the merchant simply went out of business because it failed financially—and the agreement states that a good-faith business closure is not a breach—the event necessary to trigger the guaranty may not have occurred.

A guarantor should therefore not assume that the words “personal guaranty” automatically create liability for every unpaid portion of the purchased amount.

Some Agreements State That Going Out of Business Is Not a Breach

Merchant cash advance companies generally characterize their transactions as purchases of future receivables, not loans. Under that characterization, the funder purchases a portion of receivables that the business is expected to generate in the future.

Some agreements expressly provide that bankruptcy, a slowdown in revenue, or going out of business does not, by itself, constitute a breach. That language recognizes the commercial risk supposedly accepted by the purchaser: the merchant may generate fewer receivables than expected—or may cease generating receivables altogether.

New York courts evaluating whether an MCA transaction is a true receivables purchase or a disguised loan generally consider whether repayment is absolute or contingent. The commonly examined factors include:

• Whether the agreement contains a meaningful reconciliation provision;
• Whether the agreement has a finite repayment term; and
• Whether the funder has recourse if the merchant declares bankruptcy or goes out of business.

In True Business Funding, LLC v. Guerrero A Construction Corp., the Appellate Division reiterated that the central question is whether the funder is absolutely entitled to repayment under all circumstances. Unless repayment of the principal is absolute, the transaction should generally not be treated as a loan.

Similarly, in 92 Palm Foods LLC v. Fundamental Capital LLC, the court examined an agreement providing that termination of the merchant’s business was not, standing alone, a breach. The court treated the funder’s lack of recourse if the merchant went out of business as evidence that the transaction involved a contingent purchase of receivables.

If There Was No Merchant Default, Was the Guaranty Triggered?

Suppose the agreement provides that the merchant’s good-faith business closure is not a default. The business then closes because of declining revenue, loss of customers, increased expenses, the loss of a lease, or other legitimate commercial circumstances.

The guarantor may be able to argue:

1. The merchant’s closure did not constitute a breach under the express terms of the agreement.
2. The guaranty applies only upon a breach or default by the merchant.
3. Because the merchant did not breach the agreement merely by going out of business, the guarantor’s obligations were never triggered.
4. Requiring the guarantor to pay the entire uncollected purchased amount would improperly convert a contingent receivables purchase into an absolute repayment obligation.

This does not mean that every business owner is automatically released from a guaranty when the company closes. The exact language of the agreement and guaranty controls, and the reason for the closure matters.

A Purchase of Receivables Must Include a Genuine Risk of Nonpayment

A true receivables purchaser accepts some risk that the merchant’s future receivables may decline or never materialize. If the business legitimately fails and no additional receivables are generated, there may be nothing further to purchase or remit.

If the funder can nevertheless require the individual guarantor to repay the entire purchased amount under every circumstance, an argument can be made that repayment was never truly contingent on the generation of receivables. The transaction may instead function as a loan with an absolute repayment obligation.

That does not automatically invalidate every guaranty. Courts examine the agreement as a whole, including its reconciliation provisions, term, default provisions, guaranty, and the funder’s practical ability to collect regardless of business performance.

In Premium Merchant Funding 26, LLC v. Sonata Construction LLC, the court considered the funder’s ability to recover against a guarantor even after the merchant’s bankruptcy as part of the conclusion that the agreements imposed repayment under essentially all circumstances. The decision illustrates why guarantor liability can bear directly on whether the transaction involved a genuine allocation of receivables risk.

Closure Is Different From Diversion or Misconduct

The strongest argument generally exists where the business closed honestly because it failed financially and the owner complied with the agreement while receivables were being generated.

The situation is different if the merchant or guarantor allegedly:

• Diverted receivables to another account;
• Blocked authorized withdrawals while continuing to receive revenue;
• Closed the designated bank account without notice;
• Concealed ongoing operations;
• Transferred the business or its receivables to another entity;
• Submitted false financial information;
• Continued collecting receivables without remitting the agreed percentage; or
• Intentionally caused a default covered by the guaranty.

A funder may argue that it is pursuing the guarantor because of these independent contractual breaches—not merely because the business failed.

The relevant distinction is therefore between an ordinary, good-faith business failure and deliberate conduct intended to prevent the funder from receiving purchased receivables.

Documents the Guarantor Should Preserve

A guarantor facing a claim after the business closes should preserve documents showing why and when the business ceased operating, including:

• Bank statements;
• Merchant-processing statements;
• Profit-and-loss reports;
• Tax returns;
• Sales and receivables records;
• Lease termination or eviction documents;
• Communications with customers, vendors, landlords, and employees;
• Reconciliation or financial-assistance requests;
• Communications with the MCA funder;
• Proof that the funder was notified of the closure; and
• Records showing that the business did not continue operating through another entity or bank account.

These documents may help establish that the closure resulted from legitimate business circumstances rather than an intentional diversion of receivables.

Do Not Assume That the Guarantor Owes the Claimed Balance

A demand letter or lawsuit against a guarantor should not be treated as proof that personal liability exists. The agreement, guaranty, alleged default, payment history, reconciliation requests, and circumstances of the business closure must all be examined.

Potential defenses may include:

• The merchant did not commit a triggering breach;
• The guaranty does not cover an ordinary business failure;
• The funder is attempting to recover amounts it did not actually purchase or earn;
• The agreement limits recourse when the merchant ceases operations;
• The funder prevented or refused a contractually required reconciliation;
• The guaranty imposes absolute repayment liability inconsistent with a true receivables purchase;
• The transaction was a loan in substance rather than a purchase of receivables; or
• The claimed default fees, collection charges, and attorneys’ fees are unauthorized or unenforceable.

The Bottom Line

The fact that a corporate merchant has gone out of business does not, by itself, answer whether its owner is personally liable under an MCA guaranty.

Where the agreement states that a good-faith business closure is not a breach, and the guaranty applies only to the merchant’s contractual defaults, the guarantor may have a strong argument that the guaranty was never triggered. Moreover, if the funder claims an unconditional right to recover the full purchased amount from the guarantor even though the business generated no further receivables, that position may support the broader argument that the transaction imposed absolute repayment and was a loan rather than a true purchase of receivables.

Every agreement is different. The precise language of the contract and guaranty—and the actual reason the business stopped operating—will usually determine the strength of the defense.

This article is provided for general informational purposes only and does not constitute legal advice. Merchant cash advance agreements and guaranties should be reviewed individually by qualified counsel.