What Is a Reconciliation Clause and 6 Ways Funders Avoid Honoring It

One Paragraph Carrying the Whole Legal Theory

A merchant cash advance is written as a sale, not a loan. The funder buys a stated dollar amount of your future receipts, pays you a discounted price today, and collects a specified percentage of what comes in until the purchased amount is delivered. If that description were accurate, the funder would bear real risk: a bad quarter would mean slower collection and possibly less money. The reconciliation clause is the machinery that is supposed to make that true. It is the promise that when receipts fall, the remittance falls with them.

Which is why so much litigation lands on one paragraph. If reconciliation genuinely functions, repayment is contingent and the transaction looks like a purchase. If it does not, the funder is collecting a fixed sum on a fixed schedule regardless of your revenue, which is what a loan does, and a loan is measured against usury statutes. In New York the operative ceiling for a business borrower is 25% per annum under N.Y. Penal Law §190.40, because Gen. Oblig. Law §5-521 confines a corporation to the criminal usury defense. This page is about what the clause is and the six devices that make it fail. The reasons funders give when they turn down a specific request are covered separately in the six reasons a reconciliation request gets denied, and which funders behave worst is covered in the funders most aggressive on reconciliation denials.

1. Permissive Drafting, Where “May” Sits in Place of “Shall”

Two versions of the same sentence produce two different products. One reads that the purchaser shall adjust the remittance amount upon the merchant’s request and documentation. The other reads that the purchaser may, in its sole discretion, adjust. The first creates an obligation you can enforce. The second creates an option the funder can decline while pointing at a paragraph that appears to protect you. Owners read both sentences as protection because both use the word reconciliation, and the difference sits in a single auxiliary verb.

New York’s Second Department engaged with exactly this in LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep’t 2020), where the court set out three considerations on the loan-versus-purchase question: whether there is a reconciliation provision, whether the agreement has a finite term, and whether the funder has recourse if the merchant declares bankruptcy. Looking at wording that placed adjustment in the funder’s discretion, the court reasoned that such language could leave the funder holding the discretion over whether to adjust, and it declined to grant summary judgment because triable issues of fact remained on whether the transaction was a criminally usurious loan.

Be precise about what that decision does and does not say, because overstating it is how good arguments get discounted. The Second Department did not hold that the funder bore no risk, and it did not declare the agreement a loan. It refused to resolve the question on the papers. That is still valuable: it means permissive drafting keeps the characterization question alive rather than settling it in the funder’s favor, and a live question is leverage in a negotiation long before it is a ruling.

2. A Once-a-Month Window With No Duty to Return the Excess

Timing is the quietest of the six devices and one of the most effective. A clause that permits reconciliation only once per calendar month, or only on a stated reconciliation date, means that a business whose receipts collapse in week one keeps paying the full daily amount for three more weeks before anything can move. Pair that with a clause that adjusts only prospectively, with no obligation to refund what was overcollected, and the funder keeps every dollar it took above what the specified percentage entitled it to.

That combination was examined in J.P.R. Mechanical, Inc. v. Radium2 Capital, LLC, Adv. No. 21-07079, 2025 WL 1550541 (Bankr. S.D.N.Y. May 30, 2025). The court concluded that a once-monthly clause carrying no obligation to return overcollections is not a true reconciliation provision. The same decision addressed the recourse side of the analysis, noting that guaranties combined with acceleration operate as effective recourse, and that while the bankruptcy filing itself was not treated as a default, interference with collection was.

The practical test you can run on your own document takes ten minutes. Find the reconciliation paragraph and answer four questions in writing: how often may an adjustment be requested, what is the deadline within each period, does an adjustment apply retroactively to amounts already taken, and is there any language obligating the funder to return an overcollection. If the answers are once a month, a short window, prospective only, and nothing about refunds, you are looking at the structure that decision addressed.

3. Documentation Requirements Written Without a Ceiling

Some clauses do not restrict when you may ask. They restrict what you must produce, and they do it with language that has no floor and no ceiling: such documentation as the purchaser may require, evidence satisfactory to the purchaser, additional records as reasonably requested. Because the standard is defined by the party being asked to pay, the request can always be one document short of complete, and nothing is ever formally denied. The clause remains in the contract, functioning as a gate the funder controls the key to.

That structure came up in Haymount Urgent Care PC v. GoFund Advance, LLC, 609 F. Supp. 3d 237, 247-250 (S.D.N.Y. 2022), which took it on directly. Considering an agreement that allowed reconciliation within a five-day window each month, the court observed at 249 that a funder’s discretion to demand documentation could supply a pretext for denying reconciliation. Cite that decision for its reasoning and say so plainly when you do, because later rulings in the same litigation turned on choice of law and went the funder’s way. The analytical point stands on its own; the case is not a merchant scoreboard entry.

What makes the reasoning useful outside that courtroom is that it identifies a structural problem rather than bad behavior by one company. A right conditioned on the satisfaction of the party who has to give something up is a right that party can defeat without ever refusing. That is why the first move on any reconciliation request is to force the funder to name the exact documents, in one written list, before you send another statement.

4. Verification Left Entirely to the Funder’s Own Judgment

The fourth device is a cousin of the third and reaches further. Rather than controlling the documents, it controls the conclusion: reconciliation occurs if the purchaser determines, in its sole discretion, that the merchant’s receipts have decreased. Under that wording, you can produce every bank statement, every processor report and a signed accountant’s letter, and the funder can still conclude that it is not satisfied. The clause has been drafted so that the outcome is an opinion held by one party.

A New York trial court addressed that structure in AH Wines, Inc. v. C6 Capital Funding LLC, No. 127393/2020, 2020 WL 5028672, at *5 (N.Y. Sup. Ct. Aug. 19, 2020), treating a sole-discretion reconciliation right as illusory and as indicative of a secured loan rather than a purchase. That is a trial-level decision rather than appellate authority, so it persuades rather than binds, but it names the mechanism accurately and it is the kind of citation that changes the tone of a negotiation with a funder’s counsel.

Pair this device with the first one and you can see the drafting strategy whole. Permissive language gives the funder discretion over whether to adjust. Sole-discretion verification gives it discretion over whether the predicate condition even occurred. A clause carrying both has two independent off switches, and a merchant reading it quickly sees the word reconciliation twice and assumes the protection is doubled.

5. A Minimum-Balance Covenant That Swallows the Adjustment

This one hides outside the reconciliation paragraph, which is why merchants and even some lawyers miss it. Somewhere in the covenants, the agreement requires you to maintain a bank balance sufficient to cover a multiple of the daily payment. So even in a period when the reconciliation clause would reduce what the funder takes, a separate promise requires you to keep the money available anyway, and breaching that covenant is an event of default with its own consequences.

The bankruptcy court worked through that structure in GMI Group, Inc. v. Unique Funding Solutions, LLC, 606 B.R. 467, 487 (Bankr. N.D. Ga. 2019). The reconciliation right there was limited to once monthly and was paired with a covenant to keep a bank balance of twice the daily payment, which the court measured at 34% of daily collections, with no specificity about when a reconciled amount would take effect. On a $75,000 advance with a $111,750 purchased amount and a $1,117 daily payment, the court found the reconciliation illusory.

Go looking for this in your own document under headings that have nothing to do with reconciliation: covenants, merchant obligations, bank account requirements, or the definitions section where a minimum balance gets defined once and referenced later. If the number is a multiple of the daily payment, run the arithmetic against your actual deposits. A covenant requiring reserves that exceed what a bad month produces is a covenant designed to be breached.

6. Silence, Which Requires No Drafting At All

The last device is the cheapest. The clause can be mandatory, the window generous, the documentation list defined, and none of it matters if nobody at the funder responds. No denial letter, no acknowledgment, no return call, and the debits continue at the original amount while your deposits fall. Owners experience this as being ignored by a company that answered on the first ring during underwriting. It is better understood as a decision not to create a document.

Understand why that decision gets made. A written denial explaining that reconciliation is discretionary is an exhibit. A written demand for documents the funder never defines is an exhibit. Silence produces nothing a merchant’s lawyer can quote back, and it costs the funder nothing while the fixed collection continues at full yield. The behavior is rational from the other side of the table, which is exactly why it should not be taken personally and should be documented precisely.

So build the record silence leaves behind. Send the request through the notice provision in the contract, keep proof of delivery, follow up in writing on a schedule rather than by phone, and keep a dated schedule of deposits against remittances for the same period. What that produces is a timeline a judge can follow: the request went out, receipts fell by a stated percentage, no response arrived, and the remittance never changed. And keep remitting unless and until counsel advises otherwise, because cutting off the debits on your own carries contract, guaranty and litigation consequences that vary by agreement and by state.

The Case That Cuts the Other Way, and Why It Matters to You

Any honest treatment of this subject has to include the decisions where the funder wins, because your counsel will meet them and because they show what a defensible clause looks like. The clearest recent example is Guttman v. EBF Holdings (In re Global Energy Services), Adv. No. 23-00188 (Bankr. D. Md. Mar. 31, 2025). There the agreement said the funder shall adjust, and the court treated that mandatory wording as evidence of a genuine sale rather than a loan, dismissing the usury counts while allowing fraudulent transfer, preference, turnover and disallowance claims to proceed.

The reasoning is the part to absorb. The trustee’s usury theory failed in part because the complaint did not allege that the reconciliation provision ever failed in practice, did not allege unreasonable information demands, and did not allege that the merchant ever asked for reconciliation at all. Mandatory language plus an unused right is a strong combination for a funder. That is a direct instruction about what to do while your advance is still performing: ask, in writing, in the manner the contract specifies, every period your receipts are down, and keep the answers.

It also explains why blanket claims about this industry are unhelpful to you. Some agreements contain real, mandatory, promptly honored reconciliation provisions, and those are purchases by any sensible reading. Others contain the six devices above and function as fixed-payment loans wearing a sale’s vocabulary. The New York Attorney General litigated that distinction at scale, and the trial court order in the Richmond Capital proceeding works through more than 140 sample agreements to reach it. Nobody can tell you which one you signed without reading it, and the settlement value of your file moves substantially depending on the answer. What that translates into at the negotiating table is set out in how MCA settlements get negotiated.

Who Should You Call? Our Top-Rated Business Debt Firms

One firm on this list works the entire lifecycle of a business debt file, from stopping the daily debits through attorney-led negotiation, UCC lien removal, and a signed release. The other two cover broader debt categories that often sit alongside the advances. Choose accordingly.