How to read a merchant cash advance contract

The specified percentage and reconciliation clause

Every advance contract names a specified percentage, the share of your daily revenue the funder is technically buying. The fixed daily debit you actually pay is an estimate of that percentage, built from the bank statements you submitted. This clause is the legal heart of the agreement: it is what makes the deal a purchase of receivables instead of a loan.

The reconciliation clause is the specified percentage's enforcement arm, and it runs in your favor. If your revenue drops, you can ask the funder to adjust the daily debit down to match the true percentage of your actual sales, usually by sending in recent statements. Some contracts make the funder grant this on request. Others make it discretionary, or bury notice requirements that quietly kill the right. Circle this clause and read every word of it.

A contract with no reconciliation clause, or one written so narrowly it can never be used, deserves real suspicion. Courts have looked hard at reconciliation rights when deciding whether an agreement is a true receivables purchase. From our desk it is simpler than that: a funder who priced the deal as a percentage of your sales should be willing to true it up when your sales change.

The ACH authorization

You will sign an authorization letting the funder debit your business account directly, every business day, without asking again. This is the machinery of the whole product, and it is broader than most merchants expect. Read what it permits: the daily amount, adjustments, fees, and in default, sometimes much larger pulls.

Two commitments ride along with it. You agree to keep that account open and funded, and you agree not to switch banks or block the debits without the funder's consent. Merchants sometimes change banks mid-term for innocent reasons and discover they have tripped a default. If you genuinely need to move accounts, call the funder first and get their sign-off in writing.

Personal guarantees and confessions of judgment

Nearly every advance carries a personal guarantee, but read which kind. A guarantee of performance says you personally answer if you break the contract: block the debits, switch accounts, misstate your revenue. A guarantee of payment is broader, and can put you personally on the hook simply because the business could not pay. The difference decides what happens to you, not just your business, when things go wrong.

A confession of judgment is a different animal entirely. Signing one means the funder can take a court judgment against you without a lawsuit, without notice, and without you ever presenting a defense. New York, once the center of these filings, changed its law in 2019 and largely closed its courts to confessions against merchants based outside the state, and other states restrict them too. They still appear in some agreements. We tell merchants not to sign one without a lawyer looking at it first, full stop.

Check for a UCC lien authorization in the same neighborhood of the contract. Most funders file one against the business. It is standard, but it sits on the public record and other lenders will see it, which can complicate bank financing later.

The prepayment addendum

The payback amount is fixed, so paying early does not automatically save you anything. A $60,000 payback is $60,000 whether it takes eight months or three. The prepayment addendum is what changes that: a schedule of discounts if you pay off inside set windows, say a lower effective factor inside 30, 60, or 90 days.

Most deals we place carry prepayment discounts, but only because we ask for them before the contract gets drafted. After signing, your leverage is gone. If your plan involves refinancing into cheaper money or paying down from a receivable you can see coming, get the addendum in writing up front and check that the windows match your timeline.

Default triggers

Missing debits is the obvious default. The list in the contract is much longer, and most of it has nothing to do with payment. Common triggers include changing bank accounts without consent, blocking or stopping the debits, taking another advance on top of this one, selling the business or its assets, and any misstatement in your application.

Read what default sets in motion. Typically the full remaining payback comes due at once, default fees stack on, the personal guarantee activates, and the funder can notify your processor or your customers to redirect payments. The distance between a paperwork mistake and that outcome can be a single clause. This section deserves the slowest read in the whole agreement.

Fees in the fine print

The factor rate is not the whole price. Origination, underwriting, ACH program, wire, and bank verification fees typically come out of the wire before it reaches you. The contract states the purchase price, but the number that matters is the net funded amount, what actually lands in your account. Get it in writing before you sign.

Watch the back-end fees too: default fees, blocked-payment fees, reconciliation processing fees, collection costs shifted onto you. A hypothetical $40,000 advance with $2,000 in upfront fees nets $38,000 while you repay against the full $40,000, which quietly raises the true cost of the money. Run that math on every offer you compare, because two identical factor rates with different fees are not the same price.

What we tell merchants to circle

Before anything gets signed, we sit with the agreement and circle the same short list every time. If a funder or broker will not walk you through these lines, or hurries you toward the signature page, that behavior is information too. Slow down, read, and make them explain anything that does not read plainly.

• The specified percentage and every word of the reconciliation clause
• The net funded amount after all upfront fees
• The daily debit, with your slowest recent week's deposits next to it
• The guarantee type, performance or payment, and any confession of judgment
• The full default list and what happens when one trips
• The prepayment addendum and its exact windows

Common questions