How to Read a Merchant Cash Advance Contract
To read an MCA contract or offer, find the numbers first: the purchase price, purchased amount, factor rate, specified percentage, payment and fees. Then read each clause.
To read an MCA contract, find six numbers and five clauses before you sign. The numbers set the cost; the clauses on reconciliation, default, the guaranty, confession of judgment and other financing set your risk.
Who should read this: owners holding an offer or contract, and brokers walking a client through one.
Cost, credit, speed and stacking
Cost
Credit
Speed
Stacking
Where are the key numbers in the contract?
The key numbers usually sit in a schedule or summary on the first pages of the agreement:
Line those numbers up on the Comparison sheet. Check a Consolidation offer's payoff amounts against the payoff letters.
| Term | What it means |
|---|---|
| Purchase price | Cash the funder pays for the receivables, before fees |
| Purchased amount | Total the funder will collect |
| Factor rate | Purchased amount divided by purchase price |
| Specified percentage | Share of receivables purchased; the holdback |
| Remittance | The fixed daily or weekly debit, if not a true split |
| Fees | Origination, underwriting, ACH or other charges, often taken at funding |
If your state requires a disclosure, compare these figures against it.
Not sure which company to take an offer from? Use our guide to choosing a merchant cash advance company to judge cost, payment schedule and stacking policy.
The MCA contract clauses that deserve the slowest read
The clauses that deserve the slowest read are the ones that decide what happens when sales fall or payments stop:
- Reconciliation: the process and timing for adjusting the debit
- Events of default: what counts as default, including missed debits, changing bank accounts or taking other financing
- Guaranty: what the owner personally promises
- Confession of judgment: whether the owner agrees in advance to a judgment if the funder claims default, and whether it's enforceable where you're
- Additional financing: anti-stacking and notice requirements
How do you read the events of default in an MCA contract?
List each default trigger. Note which ones the business controls. Then check what the funder can do for each one. Some triggers are routine; others are easy to trip.
Default triggers an owner can avoid
Changing bank accounts, blocking debits and taking other financing are triggers the owner can avoid. The contract usually requires notice before some of them.
Switching banks partway through the term
An owner switching banks for unrelated reasons can trip a default if the funder is not told. The new account must be authorized for debits.
How and when to give notice of a bank change
Read how and when the contract requires notice of a bank change. Send it in writing before the old account closes.
A short letter announcing the new account
A short notice works. Say you're moving your main account. Enclose the new account details and debit consent. Give the date the old account closes. Keep proof of sending.
Financing the contract restricts
Many contracts restrict taking another advance or loan without consent. Read that clause before any new funding, since a second position can breach it.
Questions to ask before signing
Before signing, ask what a missed payment triggers. Ask if the owner must sign a personal guarantee, and how early payoff works. Get the answers in writing. The FTC's small business financing guidance makes the same points and warns against being rushed. The Compare offers page turns the numbers into a side-by-side sheet.
Before you sign
Owners reading a contract for the first time usually ask these.
What is a confession of judgment in a merchant cash advance?
A confession of judgment is a clause where the business or owner agrees ahead of time. If the funder claims a default, it can get a court judgment without a trial. Enforceability depends on the state and on changes to state law. Have a lawyer explain any such clause before signing.
What counts as default in a typical merchant cash advance?
Common default triggers: blocking debits, changing bank accounts without notice, taking other funding against the same sales, and giving false facts. Each contract defines its own list. Read the events of default section in full.
Do I need a lawyer to review a merchant cash advance contract?
Having a lawyer review the contract is wise. It matters most for large amounts, stacked advances or a confession of judgment clause. A lawyer can explain terms a broker can't. Ask for the review fee up front.
How do the key numbers in an offer fit together?
Example: a purchase price of $50,000, a purchased amount of $67,500 and a $1,500 fee taken at funding. Net cash is $48,500, total cost is $19,000, and the cost per dollar received is about $0.39. A daily remittance of $535.71 means 126 payments. If the specified percentage is 10% and your sales run $5,000 a day, 10% is $500, less than the fixed debit. That gap is the reason to read the reconciliation clause closely.
Questions owners ask about this
What is the purchase price?
What the funder pays you, before fees come out.
What is the purchased amount?
The total the funder collects from your sales.
What does the reconciliation clause do?
It lets you ask for a lower payment when sales fall. Read how to request it.
What counts as default?
Read the default clause for things like blocked debits, closed accounts or new advances.
How do I see the real cost?
Subtract the cash that reaches your account from the purchased amount, then use the cost checker.
Sources
- New York Civil Practice Law and Rules Section 3218 sets the rules for a confession of judgment. One rule is a sworn statement naming the county where the defendant lives (NYSenate.gov). Review any such clause in an MCA contract against it with counsel.
- New York Financial Services Law Section 803 lists the facts a New York sales-based financing offer must show. That includes fees outside the finance charge.
Afterfirst is not a funder; all offers are subject to funder underwriting.
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See what fits.
Call 877-FUND-654 with questions.