Understanding Your Merchant Cash Advance Agreement: 5 Contract Areas to Examine

If you read just five sections of an MCA agreement, read the total cost (factor rate, purchased amount), how payments are taken (holdback percentage, daily ACH), reconciliation clause, personal guarantee and confession of judgment, UCC lien and choice of law. There’s no consensus yet what an MCA is. Is it a purchase of future revenue (not subject to usury laws), or a cleverly disguised loan (subject to usury laws)?

The Factor Rate

The advance amount is multiplied by the factor rate to reach the total amount repaid. Do the math, understand exactly how much money you are going to need to repay, then decide if that is reasonable or not. The factor rate does not work the same as an interest rate. It is usually quoted in a range from 1.2 to 1.5. So an advance of $30,000 with a factor rate of 1.4 means you are agreeing to repay $42,000, and that $12,000 is your cost of funds. For most business borrowers, this is not cheap money. Most MCAs don’t adjust their payment to recognize early payments, so paying back $30,000 borrowed at a 1.4 rate in six months or a year won’t reduce the payback amount -- it stays the same $42,000.

Next, look at how payments are taken. If they are taking a percentage of daily receipts, do the math. What’s 20% of your typical day? Is that something you can afford in slow times, high times, or always? Any percentage you see in an MCA that begins with a “1” -- meaning 10%, 15% or higher -- is likely a big number. Taken from daily receipts, that can be a lot of money that will have to be replaced from some other source each day before you can pay other bills or take out the money you need to live on. But many MCA agreements make the daily repayment amount a fixed payment, rather than a percentage tied to sales receipts. If they are taking a set amount from your account regardless of your sales, how did they decide on that number? Regardless, it is imperative that you know how they will take your money, and that you have a contingency plan.

The Reconciliation Clause

This is the part you hope to never have to read. The reconciliation clause lays out what happens when your sales fall short of what they were when you took out the MCA. The stronger versions allow you to self-certify falling sales by providing recent bank statements. The weaker versions let the MCA provider decide whether to cut your payments, and for how long. And the ones that are illusory give lip-service to cutting payments but are so difficult to invoke that they are meaningless. Do you have to submit sales data within a short period of time? Does the funder decide whether to honor it or not?

If there’s not a real reconciliation provision, then your agreement may be treated as a loan. In New York’s Second Department, whether a merchant cash advance transaction is a loan is governed by a three-part test. Those three parts are whether there is a reconciliation clause that ties payments to actual sales, whether the term is finite or indefinite and whether the funder has recourse against a merchant who files bankruptcy. There is also a form of criminal usury in New York that kicks in on rates over 25%.

In 2025, the New York Attorney General reached a settlement with companies including Yellowstone Capital LLC and affiliated companies requiring reformation of its practices. And the Attorney General said Yellowstone had portrayed its advances as purchases of a share of future revenue while almost no borrowers qualified for reconciliation refunds. The settlement resolved allegations that Yellowstone charged interest rates of up to 820% a year.

The Personal Guarantee

From the lender’s perspective, the personal guarantee is a great thing. If the corporation misses a payment, they can choose to be paid by a different party -- you. With a personal guarantee, your house, car, savings, even wages are on the line. And if you find it, look to see if it’s limited to a cap, or potentially unlimited. The unlimited ones get you for everything.

Confession of judgment: A confession of judgment is a waiver of the defendant’s right to notice or a hearing - a trial - of any kind. That can be devastating. New York banned out of state confessions in 2019. Texas HB 700 says a sales-based financing contract containing one is void. Watch out for confession of judgment language that gives the right to file against you wherever is convenient for the MCA provider, rather than in your home state or the state where the agreement was signed.

UCC lien: If you get an advance from an MCA, they may file a lien. It can block you from getting an SBA loan, a purchase offer or any other kind of financing. Don’t sign one of these without making sure you can get it terminated once the deal is done.

Sometimes the most meaningful clause in a document is the one that doesn’t explain the nature of your rights and obligations, but determines where and how you would fight if something went wrong. Choice of law and forum selection provisions can have a huge impact on whether any dispute is resolved quickly, cheaply or at all. Be realistic about your ability to defend a case in New York or wherever you are being required to appear.

If you’ve already signed an MCA with some of these terms, you may have a legal argument to challenge it or negotiate a better resolution. In states that require certain disclosures before giving the customer a loan, funders that don’t make those disclosures may have a weaker contract. Read your agreement as if you expect it to be used against you, and not as if you are excited about getting the money you need to fund your dreams.