Every merchant has slow weeks. With a merchant cash advance, a slow week can quickly become a missed payment. It’s natural to wonder: Can I wait until the week ends or until I have enough money in my account to pay the ACH? Can I wait for my future revenue to sweep in and cover it? What are the consequences of a missed MCA payment? It’s stressful, and even short-term pressures can spiral into longer problems.
Merchant cash advances (MCAs) are generally repaid using one of two repayment models: In the first repayment model, the funder takes a percentage of each day’s or week’s sales. Sales go down? No problem, repayments go down. In the second model, the funder deducts a fixed amount from the merchant’s business account each day or week. Sales go down? The amount deducted is fixed, so the merchant’s cash flow is strained. Those fixed deductions are Automated Clearing House (ACH) withdrawals, and they leave no wiggle room - they take out the same amount every day or every week. While they work well when revenue is steady, they become risky during dips. If your business experiences a slow week or a sudden problem, an ACH pull could exhaust your cash reserve and leave nothing for the next repayment.
Reconciliation Provision
That isn’t how a true merchant cash advance is supposed to work. The funder is buying a share of your future receivables and taking a risk on your ability to collect them. A reconciliation provision is a clause in your MCA funding agreement that protects you. In a real MCA, the reconciliation clause compels the funder, upon the request of the funded business, to adjust the daily or weekly payments it receives to equal the actual payments the business collects on those receivables. If you then have a slow week, you ask for a reconciliation, and your funder is contractually obligated to adjust. If the MCA provider doesn’t adjust their repayments to match your receivables, then they are essentially lending money, and courts have indicated that this can point to the agreement actually being a loan.
You need to read your funding agreement very carefully. Merchants tend to sign it like a generic document - not very carefully, if at all. It’s easy to look past the text, but if it contains the clauses you need - like your reconciliation provision - they will be there. Watch for the small words. If your contract only says you “may” request a reconciliation, it only means that you can request it. That may give the funder control over whether your repayment is adjusted to meet your actual receivables. The question is whether you have the power to make them do it. Many courts have required that the reconciliation clause be mandatory and absolute. Without that, it starts to look more like a loan than a purchase of receivables.
While you have the contract open, look for a personal guarantee and a confession of judgment. MCA providers will likely require both. If you have a personal guarantee, your creditors can come after your personal assets. A confession of judgment means you have given up your rights to defend yourself if the funder takes you to court. Courts have been holding that both are indications of a loan, not a purchase of receivables.
The Second Advance
The other trap after a slow week is the second advance. Because MCAs are so fast and easy to get, the temptation is to just take another one. An MCA advance can get you through the next week. But you must be very careful. Daily payments of hundreds of dollars can put a strain on your cash flow and put you at risk of default. Their high costs and frequent payments are why many owners find themselves needing another advance soon after the first. You could even fall into a catch-22 where a missed payment triggers another advance, or you skip a payment to take out another advance, or to keep from skipping a payment, you get another advance, and you’re right back where you started. Try to figure out how to close the cycle on a previous advance before you start another one.
Why does it matter whether your MCA is really a loan? Simply put, most merchant cash advance companies are based in New York, which means New York law, including its criminal usury statute. The criminal usury rate in New York is 25 percent. Crossing that legal threshold means a borrower can go to court and ask to have the transaction declared void. Even if the funding agreement calls the purchase something other than a loan, its terms may still make it one. Massachusetts, California, Texas, Florida and about 30 other states have usury laws as well. The New York Attorney General and the Federal Trade Commission both recently filed suits against certain merchant cash advance companies and individuals, the first arguing the deals are really loans and the second focusing on deceptive advertising.
Go over Your MCA Contract Carefully
So, back to that slow week. If you’ve missed a payment, or can see one coming, start here. Go over your MCA contract carefully. Pay close attention to the repayment terms. Do you have daily or weekly payments? Is it a straight percentage? A lot of jargon is loaded into an MCA contract. Specified Percentage refers to the percentage of your sales the funder will receive. Purchase Price refers to the amount you receive. Receipts Purchased Amount refers to the amount you have to repay the funder. There’s no APR listed on your MCA contract, so you can’t really compare to other financing. Then find the reconciliation provision. If it is mandatory, ask the funder to reconcile your payments to what you actually collected. If it is only permissive, or missing, that is worth knowing too.
If you are already behind, or the pulls are eating your cash flow week after week, you don’t have to sort it out alone. Delancey Street is a business debt settlement company that negotiates with MCA funders and lenders on behalf of business owners. Instead of selling another loan, Delancey Street negotiates for an owner to pay less than the full balance. Delancey Street is not a law firm but will refer owners to an independent attorney if litigation or bankruptcy is the right course of action. Our first consultation is always free and confidential. You have options.
