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. It’s a good idea to review any contract in detail with an experienced MCA lawyer before signing. 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 Contract
First, let’s start by defining what a merchant cash advance is, exactly. Many people think these are loans, but they are not. A merchant cash advance is a type of business financing. Technically, it’s an advance on your future receivables. An MCA company essentially purchases a chunk of your future revenue, in exchange for a lump sum advance that you can use 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 you fail to repay your MCA or breach the contract in any way, a COJ allows the MCA provider to obtain a legal judgment against you without giving you 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 agreement in, including New York, Virginia, Utah and others.
Factor Rate
Unlike traditional business lenders, which charge an 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 that are withheld as payment to the MCA funder. It’s also know as the retrieval rate, and usually ranges between 5% and 20%. For example, say that you agree to a purchased 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 have to 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 the amount you eventually pay back on an MCA.
Purchased Amount
This is the amount that the funder is buying from the merchant, or the amount of future receivables they expect to get. The purchased amount is determined by the factor rate.
Reconciliation Clause
In order to prevent an MCA from being considered a usurious loan, the contract needs to contain a reconciliation clause (as well as other details that an experienced MCA debt help attorney can explain to you upon review of the 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 need to reach out to the MCA provider ASAP. They are required to help restructure the advance so you can meet its terms for payments. 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.)
Get Legal Help With Your Merchant Cash Advance Contract
If you’re thinking about taking out a merchant cash advance to help fund your business, you may want to talk it over with an experienced MCA debt relief attorney first. A merchant cash advance may be a convenient form of business financing, but it can have major and long lasting implications for the health of your business and your personal finances. An MCA debt help attorney could assist you in reviewing the terms of a merchant cash advance contract so that you can be sure you understand all terms and the impact on your business. This way you can be in the know as to how these 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, it’s important to contact an attorney with experience handling MCA debt right away. 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, reach out to us for a no-obligation phone consultation to go over your concerns about your MCA matters. Tayne Law has been assisting business owners and individuals with their debt problems for more than two decades. We can assess your situation and answer your questions about how our services could benefit your situation. All conversations are confidential and we never share your information or outsource any aspect of our services. So give us a call at toll-free at (866) 890-7337 or fill out our short contact form.
