If you’re a small business owner who took a merchant cash advance but fell behind, you’re not alone. Lots of owners jumped on an MCA because the approval was fast - often within a week or so with minimal paperwork. The problem is that payments are taken out of your bank account daily or weekly, and a daily payment of several hundred dollars can strain your cash flow and quickly put you at risk of default. If sales slow and you need to pause or reduce the payments, you’ll likely be using a part of the contract called the reconciliation provision to ask for that relief.
With a real merchant cash advance (MCA), the funder isn’t just giving you a loan - they’re purchasing a portion of your future receivables. That means they get direct access to your bank account and pull an amount out of it every day or week. Ideally, those withdrawals represent a percentage of your received sales, but when sales slow down, you can ask the funder to adjust the payment down to match what you’ve actually collected. This is called the reconciliation provision. In a legitimate deal, the funder takes the risk if you don’t collect, so they have to honor your request.
There are two ways a merchant cash advance gets repaid. One is a percentage of your receivables. The funder just pulls out a fixed percentage, as defined in the agreement, and keeps taking it until the advance is paid in full. The other is a set amount, daily or weekly. These are ACH withdrawals, where the funder takes the same fixed amount from your business bank account every day or week until the advance is repaid. That fixed amount would be the advance, plus fees. The percentage-based one should be lower in a slow week, but the daily/weekly ACH withdrawal won’t change on its own, so a reconciliation request is what you need to do to have that lowered.
Don’t count on a regulator to make your funder lower your payments, and for good reason: MCAs aren’t even federally regulated. They are commercial transactions rather than loans, so they are governed by the UCC in each state, not banking laws. Funders are subject to truth-in-advertising laws enforced by the FTC. So your contract wording is the biggest tool you have when negotiating for a lower payment.
Look for the Reconciliation Clause
Before you call the funder, then, take a closer look at your contract. Depending on who you’re working with, it might be a bit confusing. There’s some unusual terminology in there, like ’specified percentage’ (that’s the percentage of your sales you’ll be paying back), ’purchase price’ (the amount that you took out), and ’receipts purchased amount’ (the amount you are paying back). And funders aren’t going to tell you what your APR is. Look for the reconciliation clause, and pay attention to the language: are you guaranteed that the funder will reduce your payment on request? Or does it merely say that the merchant ’may’ ask for it? One word can make a big difference.
When you are ready to ask, remember that you trigger the reconciliation when you ask for it. The funder’s job is to adjust the amount of the payment based on what you actually collected, so you’ve got to build your request around those numbers. Gather your actual collections for the period. Request that the daily or weekly payment be adjusted accordingly. Stay factual: you’re asking the funder to honor its own contract, not begging for a favor.
And if the funder refuses? That is where the wording matters. Many courts have agreed that a real MCA requires a mandatory, absolute reconciliation. If your agreement says the merchant ’may’ reconcile, and they can’t actually make it happen, courts have said that’s more of a loan. Same goes if the funder can get paid some other way - like through a personal guarantee or a confession of judgment - or if the payment is just a fixed daily or weekly sum without a mandatory reconciliation. If it’s a loan, it might run afoul of the state’s usury laws.
That matters because most MCA companies are based in New York, and New York law says the maximum interest is 25% under its criminal usury statute. And an MCA costs you, in fees and interest, typically somewhere between 40% and 750% a year, depending on how long you have the money. If an MCA is actually a loan, a court may rule that your contract is void under that statute. Massachusetts, California, Texas, Florida and about 30 other states have usury laws as well. The New York Attorney General recently sued over certain MCA transactions, claiming they are actually loans that violate New York’s criminal usury statute. The FTC also filed a case against some of the same funders over deceptive advertising. All of this is legal territory and you should speak to a lawyer about your contract.
A lot of times the contract requires a personal guarantee, which makes you personally liable for repaying the advance, so the funder can get its money back if the business can’t. The contract can also require a confession of judgment, which means you’ve waived your right to defend yourself if they sue you. Find out what’s on the line before you start negotiating the payments.
The Debt Trap
Don’t jump into another advance to solve a problem. The speed and ease of getting a business advance are tempting, and when you can’t qualify for traditional loans, the debt trap can be real. Since MCAs can have high costs and frequent repayments, cash flow will take a hit and you may find yourself needing another advance soon after the first. Refinancing won’t make much of a difference either: there is nothing to be gained by paying off an MCA early since the fees are fixed. When you refinance you are still paying all the agreed upon fees, plus possibly an early repayment penalty.
MCAs can be attractive to owners because they can be quick and easy to get, but predatory practices and costs, and the cycle of debt often do more harm than good for struggling businesses. Requesting a reconciliation is a reasonable first step when sales have dropped. The next step will depend on the outcome of the request, but the key is to keep the problem from escalating.
At Delancey Street, we negotiate with MCA funders on behalf of business owners. So what if your reconciliation request falls flat, or a reduced payment still doesn’t cut it? Our senior advisors negotiate with funders and lenders for less than your full balance owed; we do not offer you another loan. We are not a law firm, so if your contract may present usury or litigation concerns, we will refer you to an independent attorney. Our initial consultation is always free and confidential, and if a less expensive option exists we tell you during the first call.
