You’ve probably heard the term “reconciliation request” if your sales have dried up and the daily debits from your merchant cash advance are starting to eat up all of the money in your account. At Delancey Street we negotiate with MCA funders on behalf of business owners, and this is one of the questions the owners we talk to ask most: what is a reconciliation request, and can it keep the business out of default? The honest answer is that it can help, but only if the contract and the funder let it. To see why, start with how an MCA is built.
Properly Structured MCA Agreements
A merchant cash advance (MCA) works like this: The MCA company fronts a small business some money in exchange for a percentage of its future revenue, up to some set amount. Often an MCA agreement has the merchant pay off the MCA advance in daily chunks that match the business’s (estimated) daily revenues, with some kind of reconciliation process. That last piece is the one that matters here.
One difference between a loan and a properly structured MCA contract is that in a loan, you get a promise of regular payments over a fixed period. With an MCA, a drop in the merchant’s revenues should mean an automatic decrease in your payments or a reconciliation. This means either that your periodic payments go down, extending the time until you’re done paying the MCA, or that the MCA company has to return any payments it got in excess. At least in most states, properly structured MCA agreements are considered sales of future receivables rather than loans, and are therefore not subject to lending and usury laws.
A reconciliation request means the merchant is asking the funder to go back and reconcile what it’s been collecting with what the business has actually been bringing in. If revenue has gone down, the payment’s supposed to go down too, or the funder has to give the business back what it took in the meantime.
Can a reconciliation request stop a default? It can help. The whole point of the reconciliation is to get you to pay less rather than miss the payment if you have a drop in sales, but it is by no means a guarantee. It depends on what your contract says and whether your funder will honor it.
Yellowstone Settlement
A recent case shows how much those details matter. Yellowstone Capital and several associated companies have entered into a consent order with the New Jersey Division of Consumer Affairs to settle claims that the companies used abusive practices on merchant cash advances in violation of the New Jersey Consumer Fraud Act. Yellowstone denied all of the allegations. As part of the agreement, Yellowstone is required to forgive all outstanding balances for its MCA customers, which is estimated at $21.7 million, and also pay over $5.6 million to the Division.
Yellowstone agreed to change its reconciliation procedures as part of the settlement, making them more favorable for merchants by allowing more time to request a reconciliation and requiring a reconciliation to cover the entire transaction instead of just the previous month. Yellowstone had to make sure that any merchants who aren’t already in default know that they can ask for the more favorable reconciliations. They also have to review accounts when merchants default before sending those accounts to collection, provide certain notices related to default, and stop certain collection activities, including the use of confessions of judgment.
Timing matters, then. The New Jersey order says that Yellowstone has to notify merchants who are not yet in default that they can ask for a reconciliation. So it looks like the request is good if you’re current, before you miss a payment and go into default.
Prior to the Yellowstone settlement, a merchant’s reconciliation was more limited: a merchant had less time to request a reconciliation, and the reconciliation might only review what had taken place in the previous month, not the entire transaction. If you have a similarly restricted contract, you may find a reconciliation doesn’t benefit you as much as you’d think.
The state alleged that, despite being presented to the merchants as MCA contracts, Yellowstone’s agreements with them bound the merchants to pay a fixed amount over a specified time period, independent of their receivables, just as a borrower would repay a traditional loan, but without the legal protections, such as interest rate caps, that loan borrowers have. But if the contract really works like a fixed loan, with payments that are not linked at all to your receivables, the reconciliation clause may offer no real protection at all. That is the kind of contract regulators have looked at, in fact.
The New Jersey order was not Yellowstone’s first run-in, either. In 2021, the Federal Trade Commission announced that Yellowstone would pay more than $9.8 million to settle accusations that it had taken money from businesses’ bank accounts without their consent, including taking money for days after their balance was paid off. Other state attorneys general, including New York’s, have also examined MCA companies.
Read the Reconciliation Clause
So the practical approach is to take your MCA agreement and read the reconciliation clause. Pay close attention to the time frame within which you have to make your request, the period it covers, and whether your payments actually correspond with your revenue. And do it in writing while you are still current, not after you have missed payments.
If the reconciliation isn’t enough or your funder won’t honor it, Delancey Street negotiates with MCA funders and other business creditors to settle for less than the full balance. We’re not a law firm; if litigation or bankruptcy is the right move, we’ll refer you to an independent attorney. First consultations are free and confidential.
