Defaulting on a second-position MCA

Defaulting on a second-position MCA is worse than defaulting on a first. The second-position funder knows they’re behind someone else in line, they priced that risk in, and the moment you miss, they move faster and harder than a first-position funder ever would. They have to. If they wait, there’s nothing left to collect.

If you’re in second-position and you’re behind on payments, read this before you do anything.

Why second-position defaults are different

When you took the second MCA, you almost certainly violated the stacking clause in your first agreement. That’s not a small detail. That means the moment you funded the second deal, you were technically in default on the first one too. Most first-position funders don’t catch it right away. But the second you miss a payment on either deal, both funders start paying attention.

And here’s the part most business owners don’t realize — the second-position funder knows all of this. They funded you anyway. Which means they priced the deal assuming you’d default, assuming they’d have to fight for their money, and assuming they’d need to move aggressively to get paid before the first-position funder drains the account.

This is by design.

What the second-position funder does in the first 48 hours

The enforcement timeline for second-position is compressed. Here’s what usually happens, in the order it happens.

• The ACH gets retried. Then retried again. Same as any MCA default. Two or three NSF attempts, each one stacking fees on your account. But the second-position funder will often retry faster than a first-position would, because they’re racing the first funder to whatever money is left.
• The collections calls start within 24 hours, not 72. Second-position shops tend to have smaller, hungrier in-house collections teams. They call the business line, the cell, the personal guarantor, and sometimes the spouse. They’ll call from multiple numbers. They know you’re getting called by the first funder too, and they want to be the loudest voice in the room.
• The balance gets accelerated almost immediately. First-position funders sometimes wait a few days hoping you’ll cure. Second-position almost never waits. The entire remaining balance(plus default fees, plus attorney fees) becomes due in full, usually within the first week.
• They file the COJ, if they have one. Most second-position deals in New York(and a few other states) were written with a Confession of Judgment. Even though New York banned COJs against out-of-state defendants in 2019, older deals still have them, and plenty of funders still use them against in-state defendants. A COJ means they don’t have to sue you. They walk into court with the document you already signed, get a judgment entered, and start levying accounts. This can happen in days, not months.
• They hit the bank account before the first-position funder does. This is the whole game. Whoever gets the restraining notice served first, wins. Second-position funders know this, and they move accordingly. You can wake up on a Tuesday with both your business and personal accounts frozen, and the money inside already spoken for.

The stacking clause problem

Here’s what nobody tells you when you take a second MCA. The second deal almost always triggers a cross-default on the first one. So now you’re not defending against one funder — you’re defending against two, at the same time, both of whom want to be first in line to the bank account.

And if you took a third? Same thing, multiplied.

The first-position funder will usually argue that their UCC-1 gives them priority on receivables, and they’re often right. The second-position funder will argue they don’t care, because they’re going after the bank account directly, not the receivables. Both can be true at once. Both can hit you at the same time.

What actually happens to your cash flow

Within the first week of a second-position default, this is the realistic picture:

• Your bank account has been debited two or three times by each funder, each attempt triggering NSF fees.
• Your processor has received a notice instructing them to redirect deposits.
• Your customers have started getting calls(yes, they have the right to do this — they got your bank statements when they underwrote the deal, so they know who pays you).
• One or both funders have filed, or are about to file, a lawsuit or COJ.
• Your personal guarantor, which is almost always you, is now personally on the hook for the full accelerated balance of both deals.

Done correctly on the funder’s side, your cash flow is choked off within 72 hours. Not reduced. Choked off.

What most business owners get wrong

Most people in this situation try to solve it by taking a third MCA to pay off the second. This is the worst possible move and it’s the one almost everyone makes. A third deal triggers default on both existing deals, accelerates both balances, and now you have three funders calling, three UCC filings, and the same bank account everyone is trying to drain first.

The other mistake is closing the bank account and opening a new one at a different bank. Under every MCA agreement you’ve signed, that itself is a default. It also doesn’t work, because the funders have your personal info, your EIN, and a UCC-1 on your receivables. They’ll find the new account. It just buys you a few days, and it costs you whatever goodwill you had left.

What to actually do

If you’re in second-position default, or about to be, the move is to stop and get advice before you do anything else. Not after you close the account. Not after you take the third deal. Before.

Settlement, restructuring, and in some cases bankruptcy are all on the table. Which one makes sense depends on the size of the balances, who the funders are(some settle reasonably, some don’t), whether there’s a COJ, and what your personal exposure looks like.

What’s not on the table is hoping it goes away. It won’t. Second-position funders don’t lose interest. They priced the deal assuming this exact moment would come, and they’re ready for it.

You need to be too.