How to Read an MCA Agreement: 9 Questions Before You Sign or Respond

You may be feeling relieved that you have a solution to your debt, but also stressed about how this agreement will affect your business. Before you sign a workout agreement or any other legal document related to your merchant cash advance, it’s important to fully understand the terms of the agreement. The nine questions below are not intended to discourage signing a workout agreement, and the right workout could be the best solution to a short-term financial problem. But, “the right” workout agreement is one you signed with your eyes open.

The draft that you’re being asked to sign is more likely to protect the MCA provider’s interests, not your own. Never simply trust that the agreement says what you were told over the phone or by email. No matter how friendly the MCA company representative may have seemed, it’s also important to know there is no reason for you to feel pressured into signing.

What the Agreement Actually Says

Understanding what kind of agreement you’re being asked to sign may seem like an obvious starting point. But there can be a big difference in what is actually written in your document and how the representative selling the agreement to you described it. Is yours really a settlement agreement? Or is it a workout, forbearance, debt restructuring, or something else? The type of document matters, but what it actually says matters more.

Your MCA may contain so-called reconciliation provisions, and your agreement may be held up as an example of why the MCA is supposedly different from a loan. While a true reconciliation provision may protect you if your receipts fall, reconciliation can be stated, but then ignored when it’s time to put it into practice. Appellate court cases in New York have said that they will look to three factors to see if an MCA is really a loan:

• One, is there a reconciliation provision?
• Two, is the term finite?
• Three, does the funder have recourse in the event that a merchant files for bankruptcy?

In LG Funding, a 2020 New York appeals case, the reconciliation provisions were discretionary (not mandatory), and the agreement made bankruptcy a default that was backed by both a confession of judgment and a personal guarantee. To the court, those terms pointed to a failure to take on the risk of lower revenue. It refused to dismiss a criminal usury defense. That mattered because the business, as a corporation, had only one avenue to claim usury as a defense, and that was the criminal statute. For criminal usury the interest rate must have been “knowingly” over 25% a year.

If the agreement requires you to release your claims against the MCA company as part of your agreement, take a closer look at the specific language used. What does the agreement say you are releasing or giving up? That may be fine, but it’s important to be sure you didn’t have legitimate claims against your funder. Before you sign a release, consider whether any of the following apply:

• Did the funder accurately disclose the financial terms of your merchant cash advance?
• Were there errors or unfair practices in how payments were calculated or taken from your bank account(s)?

You could give up a claim that no one suspected existed, much less knew the value of. Releases do not have to cover everything: you can have them narrowed, or you can cut out (carve out) particular claims.

A personal guarantee may already be part of your merchant cash advance agreement. It’s important to know whether you are also being asked to confirm the guarantee or to sign a new one. Even if your personal guarantee was questionable, signing a new one can strengthen the lender’s hand. Here’s a key question you should be able to answer before you sign: Would this agreement give you enough of a benefit to make it worth signing, especially considering that the funder would be better protected if you did?

Don’t confuse a new confession of judgment with confirming an old one. Your old MCA may have included the right to confess judgment. Even if yours does have a confession clause, your being asked to sign a new one can give the lender more leverage. Having a confession of judgment clause allows a lender to potentially go straight to court, get a judgment, and quickly get going on collection after judgment. The importance of signing a new confession of judgment clause depends partly on what the law is in the state where you live. In New York a confession of judgment can only be filed in the county where you live or do business. This change took effect in 2019. In Texas, a confession of judgment can void the whole contract.

You might think a small mistake won’t matter, but ”one missed payment” can quickly escalate to much bigger consequences. Miss one and the entire balance may be immediately due. That will vary by agreement, but you need to understand what the agreement actually says, not just what you may have been told would happen. Read your contract for anything that is listed as a “default.” Look for notice requirements, a grace period, and a cure period. Never assume you automatically have a grace period. Before you sign, consider whether you will likely be able to comply with all of its terms every time they are due.

If the workout uses the term ”true sale” as part of claiming that the MCA is not a loan, stop and take another look. A true sale of your future accounts receivable would not carry an obligation to pay the MCA funder a set amount, no matter what your business took in. If you do decide to sign the agreement, be sure you understand whether the agreement also says you are releasing any usury claim.

You need to look closely at how the agreement treats the Uniform Commercial Code (UCC) lien. Because receivables transactions are covered under UCC Article 9, in many instances funders can legally file liens against you. If there’s a UCC lien, how will that change if you sign the agreement, if at all? Does the funder continue to hold a UCC lien against your assets? Before you sign a settlement agreement or other kind of payoff, be sure you get a commitment to terminate the lien in writing.

You can’t assume the choice of law will be the state where your business is or even the place where the funder has its headquarters. Choosing which laws apply is one thing; saying where a lawsuit can be filed is another matter (called ”forum selection”). Don’t overlook where you might be sued on the agreement you’re being asked to sign. A business that has nothing to do with New York can still end up being sued there. If you’ve been sued, check out the deadline to respond: you can’t ignore it because your company isn’t based in New York.

You may have been told that you can only get this agreement or that your time to decide is limited. It can still be in your interest to take your time and think it through, rather than rush into a decision.

Subchapter V Bankruptcy

Signing a workout agreement is not your only option to get out of debt to a merchant cash advance funder. Depending on the circumstances of your business debt, bankruptcy may be another option to resolve debt that is keeping you from getting ahead with your business. Subchapter V is a streamlined reorganization just for small businesses. The Subchapter V process can work for you, but it is not available to everyone. Filing for Subchapter V bankruptcy automatically triggers a stay on covered collections.

Read Carefully

Before you sign a workout agreement that could affect your business finances for years to come, you want to know what you’re agreeing to. So read carefully anything that you’re considering signing related to your business’s debt.