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Understanding Your Merchant Cash Advance Agreement: What To Look For in an MCA Contract

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If you’re considering a merchant cash advance (MCA), be sure you fully understand the contract and its terms first. Navigating these contracts can be tricky. And there might be language or clauses that you don’t fully understand that could negatively impact your business.

First phone
consultation is always free.

Reviewing any contract in detail with an experienced MCA lawyer before signing is a good idea. But as a start, it also helps to know what MCA contracts generally include and what to watch out for. 

Terms to Understand in a Merchant Cash Advance Agreement

First, let’s start by defining what a merchant cash advance is, exactly. Many people think these are business loans, but they are not. A merchant cash advance is a business financing option. Technically, it’s an advance on your future receivables often made to small business owners. A merchant cash advance company essentially purchases a chunk of your future credit card sales in exchange for a lump sum advance that you can use as cash flow to cover business expenses.

MCAs can be confusing and expensive. That’s why it’s crucial to understand your contract before signing anything. Otherwise, you could end up in a cycle of debt that your business may not recover from.

Here are some other terms you should be familiar with.

Confession of Judgment (COJ) 

One common provision in merchant cash advance contracts is known as a Confession of Judgment clause. If the borrower fails to repay your MCA or breaches the contract in any way, a COJ allows the MCA provider to obtain a legal judgment against without giving notice. It basically waives your right to defend yourself in court if you’re sued. 

The good news is that some states now prohibit COJs (including New York), with some exceptions. Different MCA contracts will also have varying rules about which jurisdictions and states they can enforce the merchant cash advance agreement, including New York, Virginia, Utah, and others. 

Factor Rate

Unlike traditional business lenders, which charge an interest rate or annual percentage rate, MCA companies charge a factor rate. This usually ranges between 1.2 and 1.5. To calculate the cost of an MCA, you multiply the amount borrowed by the factor rate. For instance, say you borrowed $30,000 with a factor rate of 1.4. In this case, you’d repay a total of $42,000 ($30,000 advance + $12,000 in fees).

Holdback Rate

The holdback rate is the percentage of your daily credit card sales withheld as payment to the MCA funder. It’s also known as the retrieval rate and usually ranges between 5% and 20%.

For example, say that you agree to a purchase percentage of 20%. If $1,000 is deposited to your business bank account for the day, the funder will take $200 from that amount. The holdback rate is determined by a few factors, including the total advance amount, daily credit card sales, and how long you must repay the MCA.

Purchase Price

The purchase price is the amount that the merchant gets funded in return for selling their future revenues. In other words, it’s the size of the advance you receive upfront as a lump sum.

This amount is determined based on the financial health of your business and its projected growth. Know that the amount funded is not what you eventually pay back on an MCA. 

Purchased Amount

This is the amount the funder buys from the merchant, or the amount of future receivables they expect to get. The factor rate determines the purchased amount.

Reconciliation Clause

To prevent an MCA from being considered a usurious loan, the contract must contain a reconciliation clause (as well as other details that an experienced MCA debt help attorney can explain to you upon review of the merchant cash advance agreement and terms).

Also known as a re-adjustment clause, this states that you have the right to restructure your MCA if revenue declines and your business is challenged or put in danger due to unmanageable MCA payments. If this happens, you must contact the MCA provider ASAP. They are required to help restructure the advance so you can meet its repayment terms. The idea is that the MCA funder will work with you to lower the payment until your revenue meets its original target. 

Repayment Period

This is the length of time you have to pay back your advance. The repayment period for MCAs is typically much shorter than for traditional bank loans (about 90 days to 24 months). The exact amount of time it takes to pay off your MCA depends on how well your business is doing; the more credit card transactions you have, the faster it’ll get paid.

On the flip side, if your revenue drops, you’ll pay back the MCA more slowly. (You could end up in default if you stop or miss payments.)

If you’re considering taking out a merchant cash advance to help fund your business, you may want to discuss it with an experienced MCA debt relief attorney first. A merchant cash advance may be a convenient form of business financing. Still, it can have major and long-lasting implications for your business’s health and finances.

An MCA debt help attorney could assist you in reviewing the terms of a merchant cash advance contract to ensure you understand all terms and the impact on your business. This way, you can know how these MCA agreements could come back to bite you.

Already have a merchant cash advance? If you’re struggling to keep up with payments or have defaulted, contacting an attorney with experience handling MCA debt is important. Defaulting on an MCA can be detrimental to your business and personal finances. A reputable MCA debt relief attorney can help you resolve your MCA debt in a way that fits your budget and allows your business to continue operating. 

If you’re on the fence about hiring legal help, contact us for a no-obligation phone consultation to review your MCA matters. Tayne Law has assisted business owners and individuals with their debt problems for over two decades. We can assess your situation and answer your questions about how our services could benefit you. All conversations are confidential, and we never share your information or outsource any aspect of our services. So call us at (866) 890-7337 or fill out our short contact form

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