If your revenue really did fall in 2026 and the daily debits on your merchant cash advance have become more than the business can carry, default can start to look like the only option. Yet many merchants think they’re going to default when the truth is, they’re not. They just don’t understand that their contract protects them. Before you stop paying, know that most contracts give you the right to tell the funder your daily repayment amounts can be lowered.
Purchase and Sale of Future Receivables
A merchant cash advance is written as a purchase and sale of future receivables. When an MCA company purchases your future receivables, it buys them at a discount. Say it buys $50,000 worth of the receivables your business is expected to generate and pays you $37,500 for them. The upfront cash advance you receive when you take out an MCA is less than the total future receivables amount. The funder then collects a percentage of your daily or weekly receipts, or a fixed daily amount meant to approximate that percentage. It invests cash up front with the expectation that your business will generate the needed cash. But because it only purchases receivables to the extent you produce them, it shares your risk.
So what’s the significance of this distinction? The “non-loan” status of an MCA is more than just semantics. If an MCA is not a loan, the funder is also not a lender. The theory is that since the funder technically does not loan anything, it is only buying a stake in your future receivables. And therefore the funder is not subject to the “usury laws” that govern interest rates on loans, and is not required to obtain a lending license. Under common law, an advance is generally a loan only if it must be repaid unconditionally. With an MCA, the funder is neither lending money nor extending credit - the funder is buying a portion of your future receivables. Your obligation to deliver those receivables depends on your business continuing and producing them. If it doesn’t, that’s the funder’s risk to bear.
Reconciliation Clause
In every MCA agreement you will find a reconciliation clause. Some contracts call it a re-adjustment, a true-up, or a look back. It’s the essential component of a MCA that allows it to be a non-loan. For you, it’s a key part of your option to lower your payments. It says that if your daily or weekly revenues decline, you have the right to have the payment adjusted downward to match the repayment percentage in the contract, and some agreements obligate the funder to make that adjustment once you tell it your receivables have fallen. One common version says there is no interest rate, payment schedule, or time period in which the purchased amount must be collected. In other words, your agreement to pay is completely non-interest bearing. Your agreement to pay has no due dates. Your business going bankrupt or out of business doesn’t count as not doing your part of the deal. And the funder signs knowing your business may slow down or fail.
When sellers struggle to keep up with their payments, the funder will say they will consider a lower daily or weekly payment. And then nothing. No response. Most often, they never inquire about or examine the merchants current financial statement, which is exactly what the agreement says that they must do to determine a new payment amount.
That failure matters, and a federal case out of the Southern District of New York, TVT Capital v. Epazz, Inc., shows why. In determining whether the agreement is a sale or a loan, a court must determine whether the amounts owed under the agreement are payable unconditionally. In this case, the amounts are not payable absolutely because the obligation to make payment is conditional on Epazz’ ongoing collection of accounts receivable from its own customers. Under the agreement, TVT takes 15% of all daily receivables and if sales of product decrease or stop altogether, TVT may not be repaid in full. The judge found the reconciliation clause valid. The MCA was not a loan. But the court also noted that there is no allegation that TVT refused to honour a request from Epazz to reconcile the payments. The balance of the decision, for you, is all about your option to adjust.
So if you are close to default and your revenue really has fallen since you took the advance, tell your funder in writing your daily payments are too high. Then ask for an adjusted repayment schedule that allows you to keep paying and stay in business. Ask it to review your most current financials and set the new payment from them. Ask for a reconciliation. It sounds basic, but people often don’t write this down, and failing to tell the funder about the decline, or failing to request a reconciliation, will greatly weaken your legal position. But begging will never get you to a lower repayment amount. That will only happen if you demonstrate that you have less money coming in.
Illegal, Usurious and Unenforceable Loan
If the funder refuses to lower the payment, or won’t even look at your financials, what they’re doing is denying you that adjustment and your right to lower your payments. If the funder doesn’t ask for your financial records and it doesn’t make the adjustment anyway, it didn’t comply with the contract requirements. At that point you have a really strong case that the advance was never conditional at all, and was in fact an illegal, usurious and unenforceable loan. If the funder still refuses, you might have your case, because now you have a written record to back it up.
Courts decide that an MCA is a sale and not a loan, if the merchant doesn’t promise that the receivables will exist in a certain amount. A few other terms point the same way. If receivables fall because of adverse conditions, such as the loss of a location, a natural disaster, a pandemic or a similar change, it is the MCA company’s loss, not the merchant’s. The funder is assumed to have taken the risk when it decided to buy the receivables. If the merchant declares bankruptcy, it’s not a default and it’s not a breach. The owner guarantees that the business will not violate the covenants, but does not personally guarantee repayment. And the delivery of receivables is dependent upon the existence of the business. If these terms are missing from a merchant cash advance contract, it may be a loan, not a purchase of receivables.
So before you default, pull together your latest numbers. Ask your funder to review your most recent financial records and lower your payments to reflect the percentage of daily receivables specified in the MCA contract. Again, the contract may call it a re-adjustment or a “true up” or a “look back”, but the request is the same. You need to make it clear to the funder you are requesting an adjustment. It may well get you an accurate, lower payment. If the funder will not adjust, you have a very strong defense that the advance is in fact an illegal and unenforceable loan. Don’t just default and walk away without taking action first to protect yourself. Talk to an attorney before you miss payments. Default is your last resort. Don’t default if you don’t have to.
