5 Things You Need To Know About Reconciliation Clauses in Your MCA Agreement

Almost every merchant cash advance contains a reconciliation clause. Almost no funder honors it without pressure. Reconciliation is the contractual right that distinguishes an MCA from a fixed-payment loan, and it’s the right that funders work hardest to undermine. Here are the five things you need to know to use reconciliation as the leverage tool it was meant to be.

1. Reconciliation Is What Makes an MCA Legally an MCA

MCAs are structured as purchases of future receivables, not loans. The legal distinction matters because loans are subject to usury laws (capped at 16 to 25 percent in most states), while purchases of receivables are not. The thing that makes an MCA a true receivables purchase, and not a disguised loan, is the funder’s exposure to actual receivables: if revenue drops, the funder gets paid less and over a longer period.

Reconciliation is the mechanism that creates that exposure. Without reconciliation, the MCA looks identical to a fixed-payment loan, which means it’s usurious in most states. Funders need reconciliation to exist in the contract to defend the product structure. Whether they actually honor reconciliation is a separate question.

2. Sham Reconciliation vs. Real Reconciliation

Real reconciliation says: “If your monthly revenue is below the baseline, the daily debit will be reduced proportionally upon written request and supporting documentation.” Sham reconciliation says: “Reconciliation is available solely at funder’s discretion upon merchant request.” The difference is enforceability.

Courts in New York, New Jersey, and Connecticut have started scrutinizing sham reconciliation clauses and reclassifying those MCAs as usurious loans. If your MCA’s reconciliation clause is purely discretionary, you may have a usury reclassification argument that independent counsel from our referral network can develop.

3. How To Properly Demand Reconciliation

A reconciliation demand is a written request that triggers the funder’s contractual obligation to respond. The demand should: identify the specific contract section creating the reconciliation right, attach bank statements or processor reports documenting the revenue decline, calculate the requested adjusted debit based on the formula in the contract, and set a reasonable response deadline (seven business days is standard).

Send by email and certified mail. Keep delivery confirmation. The paper trail is what matters when negotiations move toward settlement or counsel is brought in for litigation.

4. What Funders Do to Avoid Reconciliation

Common funder tactics include: requiring impossibly detailed documentation (year-to-date P&L, audited statements), demanding personal financial disclosures unrelated to business reconciliation, requiring reconciliation only after default (which forfeits other rights), or simply not responding at all and continuing to debit.

Each of these tactics fails legally if challenged. The contract typically requires only commercially reasonable documentation, not audited financials. Personal financial disclosure isn’t required by the reconciliation clause. Pre-default reconciliation is a contractual right that doesn’t require default to exercise.

5. Reconciliation as Settlement Leverage

Once you’ve documented a reconciliation refusal, you have evidence the funder is treating the MCA as a fixed-payment loan. That evidence drives settlement discussions in two ways. First, it creates regulatory exposure (state AGs and the FTC have brought cases on similar fact patterns). Second, it creates a usury reclassification argument that, if successful, could void the entire balance.

Settlement discussions with documented reconciliation refusals typically resolve 10 to 20 cents on the dollar below comparable cases without the refusal evidence. The funder is paying to make the usury argument go away.

Practical application starts today, not after the next default:

• Pull your MCA contract today. Find the reconciliation clause and read it carefully.
• Note whether reconciliation is mandatory or discretionary. If discretionary, you may have a usury argument; if mandatory, you have direct enforcement rights.
• Document any current revenue decline. Even a 15 percent decline supports a reconciliation request.
• Send a written reconciliation demand before the situation reaches default.
• Keep the funder’s response (or non-response) in writing. This is your file for any future workout.

Reconciliation isn’t just a contractual right; it’s the foundation of the entire MCA workout playbook. Every settlement, every UCC dispute, every PG fight rests on the framework reconciliation creates. Treat the clause as your most important defensive asset.

Senior advisors review reconciliation clauses on every intake call. The strength or weakness of your specific clause shapes the entire strategy.

Delancey Street is a business debt-relief company, not a law firm. When a matter requires legal work, we refer you to an independent attorney from our referral network; the attorney–client relationship is between you and that attorney.

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