MCA Glossary: 24 Terms for Reading Contracts, Collection Letters and Court Papers

You’ve taken out a merchant cash advance. Possibly for the first time. Now you’re facing collection calls. Angry emails. Demanding letters. Lawsuits. You’re in trouble. You’re confused. They want you to pay, but you don’t know what to do next. They’re talking in what feels like a foreign language.

Your merchant cash advance agreement is intimidating. It’s loaded with unfamiliar language and endless legal jargon. Thankfully, the words on the page do one of three things: tell you what you owe, what the funder can do if you stop paying, and how fast court papers let it take your money. Learn these in that order and you can start making real progress with your merchant cash advance problem.

What You Owe

We’re going to start with the basics: what you owe. In any written agreement, you can learn what you owe by figuring out the purchase price, the purchased amount, and the factor rate. It’s a lot easier than it sounds. The purchase price is the amount the funder pays you on day 1 of the advance. This is the entire amount of money you receive. Next, the agreement outlines the amount you are required to repay. It is often called the “purchased amount”. So the question becomes: how do you get from the amount you get to the amount you owe? That’s where the factor rate comes in. The factor rate is a multiplier. It is normally between 1.2 and 1.5. In other words, if you get $30,000 and the factor rate is 1.4, you have to pay back $42,000. The problem with factor rate is it doesn’t go down if you pay your advance back faster.

The specified percentage or holdback is the amount the funder will pull out of your account every day. It’s normally somewhere between 5 and 20% of your daily sales. The percentage works to flex with you. If you have a slow day, the funder collects less. If you do better, they get more. The problem is a lot of funders take out a fixed daily amount via ACH debit even when the language says it should be a percentage of sales.

Most funders of merchant cash advances fight tooth and nail to characterize the money they give as something other than a loan. The implications are huge. The agreement you signed will look a lot like a loan but probably isn’t called one. It’s probably called a purchase and sale of future receivables. This is important because as a sale of future receivables, the money isn’t covered by most state usury laws. There are a lot of agreements out there with effective interest rates from 70% to 350%.

Reconciliation clause is the basic price adjuster. It lets you ask for lower payments if sales fall short. Without reconciliation, courts are more likely to call the agreement a disguised loan and subject to state usury laws. There are three questions NY judges usually ask to decide if the deal is really a loan: (1) Is there a reconciliation clause, (2) Is the term finite, and (3) Can the funder collect if you file for bankruptcy? But all reconciliation clauses are not equal. In LG Funding v. United Senior Properties, the court allowed a criminal usury defense to proceed against a funder who kept language in the agreement making reconciliation subject to the funder’s “sole discretion.” The court also found a default clause in the agreement that applied if the borrower filed for bankruptcy.

Criminal usury: A state law that makes the “collection” of “interest” in excess of 25% a year on a loan a crime. In New York, it’s a class E felony.

Default

Now that we know what you owe, we can start talking about what happens if you don’t pay. Default. That’s the catch-all that unlocks all the rights and remedies the funder has. The question is, what does it take for you to default? Typically, default is triggered by missed payments, but the language might be vague, giving the funder a basis to call default even when you’re paying.

The funder will normally demand a personal guarantee. It’s their ace in the hole. The personal guarantee makes you personally liable for anything the business doesn’t pay. Sometimes the funder’s rights in the guarantee are limited. Sometimes they are unlimited. This means the funder can take money from your personal bank accounts, seize your personal assets, and even garnish your wages after a court judgment.

Default is a powerful clause on its own, but it becomes downright terrifying when paired with a Confession of Judgment clause. Confession of judgment is a shortcut to a court judgment. It is a signed affidavit, letting the funder get judgment without a lawsuit, notice, or hearing. And once judgment enters, your accounts can be frozen, seized and levied within days. Since 2019 NY has made it harder to use Confession of Judgment against out-of-state businesses. Now the judgment has to be filed in the borrower’s county, and only within 3 years of signing. But that means New York resident businesses are not protected.

A UCC-1 Financing Statement is a broad public lien on the business’ assets. It can have a broad effect on your ability to secure new financing or sell the business. And it lasts 5 years unless continued. UCC-1 termination is the part of UCC filings people don’t remember. Unless you get an agreement to terminate, the lien often stays on file even after you paid off the advance.

The choice of law clause tells the court what state’s law applies to the agreement. Forum selection clauses name the jurisdiction where you have to fight the case. Funders often name New York as both the choice of law and forum, even if your business is in another state. This means you may have to litigate the case in New York.

How Fast Does All This Happen

That leads us to the last question: how fast does all this happen? Or in other words, how fast can the lender start to take your money? The answer is: it depends on the deal, but it can happen very, very quickly.

After judgment, the funder may serve your bank with a restraining notice. In New York, it can freeze up to twice the amount of the judgment.

Judgment Interest: A percentage tacked onto the judgment amount. In New York, business cases generally carry 9% a year until the judgment is paid in full.

Disclosure rules are a new and expanding area of law. New York and California have enacted merchant cash advance disclosure laws, and more are on the way. New York requires a finance charge and APR or estimated APR disclosure on deals up to $2.5 million. California’s SB 1235 puts required disclosures on deals up to $500,000. Non-disclosure, as defined in these laws, may make your agreement more vulnerable to legal challenge.

Texas HB 700: A Texas law in effect September 2025 that bans filing a confession of judgment and limits automatic payment out of bank accounts. Exceptions can be made for automatic transfers if the funder holds a first-priority security interest in the account.

When you’re looking to fight back, a firm understanding of the key terms can help you get the leg up you need. If you’re getting attacked on a merchant cash advance you’ve defaulted on, speak with an attorney about what your next steps can be.

One last word: canceled debt. It’s good when you get it, but it can come with a tax bill. Canceled business debt is generally taxable income. Notably, you can exclude debt canceled if you were insolvent just before the debt was canceled, up to the amount of the insolvency. In that situation, form 982 needs to be filed.