If you are paying MCA daily payments while watching your sales decline, you know the routine. It’s maddening. You need that cash flow, but now your MCA daily payments have become a bigger problem than your sales. Can you get the daily payments lowered? And if so, how? Often you can, and here’s the trick: not everyone knows to ask.
A merchant cash advance is a purchase. It’s not a loan. This is not quite the same thing as getting a loan and repaying it in equal, regularly scheduled payments. Instead, you are selling the funder part of your revenue, and he pays for the privilege in advance. An MCA is basically the same as selling invoices to someone. The funder buys your future sales for a fixed amount, and you pay them back only if your business does well. This is different from a loan: you don’t have to pay back what you didn’t actually collect. If the business fails, you don’t owe them the sales you never made, and the funder can’t go after your other assets. At the start, the funder accepts the risk it might not get repaid. You might see a lot of protections around funders. They’ve got security agreements. They’ve got personal guaranties. They might even have confessions of judgment. But many courts have said that, even with all of that, funders still take on a huge amount of risk that they won’t recover their money, especially if the business fails.
That structure is what opens the door to a lower payment. The MCA agreement doesn’t have an interest rate. None. That means the amount the business has to pay isn’t going to go up because it takes the business longer to deliver the receivables. The daily debits themselves are just estimates based on what you expect your receivables to be each day, and you can ask to adjust them down if business slows. If a daily payment with an MCA could never be less than a certain number, that wouldn’t make sense, because the whole point of the instrument is that you don’t have to pay it back if you don’t have enough sales to do so.
There is also a legal reason the funder has to take that request seriously. Many MCA deals use New York law, and New York has a 25% criminal usury cap for corporate loans. Some owners sue funders by claiming the agreements are really disguised loans that have to be repaid no matter what, saying that if you annualize the fixed daily paybacks you’d end up paying way over 25% per year. Most of those cases get dismissed at the trial court level because the written deal shows the MCA was not a loan. A big part of what that paperwork has to show is flexibility. Lots of these agreements have a “reconciliation provision.” This lets you ask, and requires the funder to give you, a true-up of your daily payments so they match your actual lower receivables. These kinds of contracts, which match the real ups and downs of your business and change payments as needed, are usually the kind courts decide are not loans.
How do you know if your agreement is really a loan, even if it says it isn’t? The Second Department in LG Funding v. United Senior Props. of Olathe (2020) put together a three-part test. Look for:
- A reconciliation provision.
- A fixed end date.
- Any recourse if you file bankruptcy.
The court really paid attention to how the agreement used the word “may” in the reconciliation clause. That could give the funder the power to decide whether or not to adjust your remittances based on reduced sales. Since the LG Funding ruling, courts have been digging deep into these “reconciliation” clauses. The question is whether reconciliation is your right or something the funder can hand out or withhold as it pleases. If the LG Funding factors suggest it’s really a loan, courts have granted preliminary injunctions in favor of merchants or denied the funders’ motions to dismiss.
In Davis (2021), an appellate court (the First Department) said those MCA contracts may actually be loans, based on the discretionary reconciliation clauses in the contract and the allegations that the funder refused to allow reconciliation. It also referenced daily payment rates which did not appear to be a good faith estimate of the business’s receivables. Since the daily payment is supposed to be a rough estimate of a certain percentage of what you sell every day, a number that’s way above what you really bring in makes it look less like a sale of future money, and more like a loan. The court also pointed out that the agreement made automatic debit rejections after two or three tries an event of default – even if there was no warning. This triggers full repayment, and other terms let the funder collect from your personal guaranty if the business can’t pay or files bankruptcy. The decision also suggests that if the funder failed to provide the reconciliation even after the MCA was validly signed, that breach might show the funder treated the deal like a loan instead of a true purchase of receivables.
In the case People of the State of New York v. Richmond Capital Group, the New York Attorney General says the funder’s actions after signing the contract make these agreements into loans. Specifically, they point out that the funder files for a confession of judgment or pushes on the personal guaranty after just one missed payment, they “double-dip” on the daily payments, and they don’t allow reconciliations. The AG also claims the funders sold these deals as loans before the contracts even existed. They said these were loans in phone calls, emails, and on websites that talked about repayment. They evaluated applications like loans—checking credit scores and bank balances, not historical receivables. In June of 2021, the judge said no to the funders trying to get this case thrown out. The funders said because the paperwork wasn’t structured as loans, they couldn’t be usurious, but the court said no.
If you’ve seen your sales or receivables drop, do this first: Check your agreement for a “reconciliation” or “true-up” clause, and see if it says reconciliation is your right or if the funder “may” do it. If it exists, ask the funder to true-up the daily remittances based on your lower receivables. Document the request and the funder’s response. If they say no, that refusal can be a breach and might even help show the agreement was really a loan.
Bottom line: The daily payment in a merchant cash advance is only an estimate. It is not a debt payment. And when your sales go down, a properly written agreement says you have the right to have it lowered. If the funder has the sole power to decide whether it goes down (or refuses to lower it), they open themselves up to having their deal called a loan. If your funder will not budge even after you ask, that is the point to talk to someone who negotiates with MCA funders for a living, before the next missed debit turns into a default.
