When a business requires working capital, a merchant cash advance can be a fast funding option. However, understanding an MCA agreement is vital because these contracts contain complex structures that can significantly impact a business’s daily cash flow.
In this guide, we evaluate the standard clauses found in a typical MCA agreement and explore how these terms affect your business operations.
What is an MCA Agreement?
A merchant cash advance is often structured as a sale of future receivables, not a traditional loan. Under a typical MCA agreement, a funder provides a lump sum to a business in exchange for a percentage of its future credit card or bank deposit sales.
Because MCA transactions are often structured as purchases of future receivables rather than traditional loans, they may be treated differently from commercial loans under applicable law depending on the agreement and jurisdiction. Repayment is usually collected through automated daily or weekly withdrawals from the business bank account.
Key Terms to Evaluate in Your Contract
Understanding an MCA agreement requires reviewing the specific terminology used by funders. Here are some of the critical clauses that can appear in a contract to evaluate.
Factor Rate and Total Payback
Unlike a traditional loan that uses an annual interest rate, usually an MCA agreement uses a factor rate. This is a multiplier, typically ranging from 1.2 to 1.5, which is applied to the advance amount to determine the total repayment obligation. For example, if your business receives a 30,000 dollar advance with a factor rate of 1.4, the total repayment amount is 42,000 dollars.
Holdback Rate or Specified Percentage
A holdback rate determines the percentage of your daily or weekly sales that the funder will withdraw. This specified percentage usually ranges between 5 percent and 20 percent of daily receipts. While the payment fluctuates with sales volume, a high holdback rate can, at times, cause severe cash flow constraints during slow periods.
Reconciliation Clause
A reconciliation clause is a vital component of the contract. It allows a business to request adjustments to their daily payments if their actual revenue declines. Evaluating whether your agreement includes a functional reconciliation clause is an important step, as it provides a mechanism to request modifications based on business performance.
Personal Guarantees
Many commercial funders require a personal guarantee. This clause holds the individual business owner personally liable for the repayment if the business is unable to satisfy the obligation.
Confession of Judgment
A confession of judgment clause allows the funder to obtain a legal judgment against your business without giving you prior notice or a hearing. Some states have prohibited these clauses, but they remain a point of evaluation in many contracts.
UCC-1 Financing Statements
An MCA agreement often grants the funder the right to file a UCC-1 financing statement. This creates a public lien on your business assets and receivables, which may impact your ability to secure other forms of commercial financing.
Exploring Options for Business Debt
When daily withdrawals begin to affect operational stability, a business may need to assess potential solutions.
Engaging with a professional program can assist in evaluating the contract terms and exploring strategies for restructuring the obligations.
Coastal Debt Resolve may coordinate with independent legal professionals when appropriate to review your specific agreement terms. Our team has experience working with commercial creditors to explore potential restructuring or settlement options based on your actual cash flow.
Results vary based on business circumstances and creditor participation. Coastal Debt Resolve is not a law firm and these materials do not constitute legal, financial, or professional advice.
Frequently asked questions
If your contract includes a reconciliation clause, you may be able to request a payment adjustment. However, this depends on the specific agreement terms and creditor participation.
No. A factor rate is a fixed multiplier used to calculate the total repayment amount from the beginning of the agreement.
Yes, if the contract includes a personal guarantee, the business owner may be held personally liable for the debt.
No. Services are provided exclusively for businesses and commercial obligations. This is not consumer or personal debt relief.
No. Debt resolution outcomes are not guaranteed. The process depends entirely on individual business circumstances and the willingness of the creditor to engage in negotiations.
