You missed a payment on your MCA, or you’re about to. Now you’re looking at the contract and you spot that paragraph about “reconciliation.” It sounds promising, like they can lower your payment or let you off the hook if sales take a nose dive. But before you get your hopes up, it pays to know what that clause actually does and why the funder agreed to it in the first place. For an owner who is behind, that clause can feel like a ray of hope in a very dark moment.
Start with how the deal is built. On paper, a merchant cash advance is not a loan: the funder is buying your future receipts, and your business is selling them. You take the money, they take a huge amount of future receipts, all drawn down electronically from your bank account, and you pay a lot of fees, too. The catch is that the difference between what they give you and what they get back in the end is usually far greater than what criminal usury law would permit. Which is probably the reason they are structuring this as a purchase of receivables rather than a loan.
The merchant cash advance agreement usually tells you that this is not a loan. That doesn’t mean it isn’t. It also has something called a reconciliation clause which in vague terms says that if certain projected receipts aren’t received, then your repayment amounts could be reduced or even forgiven. It also comes with security like a confession of judgment and personal guaranty signed by you.
Funders appear to favor a clause saying disputes go in New York State courts, no matter where you’re located, and so New York courts have dealt with many challenges where the merchant says the ‘purchase and sale’ agreement is really usury in disguise. Sometimes merchants raise this as a defense if the funder sues on it, sometimes in a motion to vacate a confession of judgment against the owner, and occasionally as the merchant’s own claim against the funder, under RICO or otherwise.
LG Funding V. United Senior Properties of Olathe
The case that tied those disputes together is LG Funding v. United Senior Properties of Olathe, Appellate Division Second Department, March 2020. The merchant obtained about $100,000 and consented to being debited for $129,000. When the funder sued, the merchant asserted a defense of criminal usury. The court dismissed the merchant’s counterclaim, but let the usury defense stand.
The court’s starting point was whether the money is repayable absolutely. If not, it’s not a loan. Courts generally look at three things to figure out whether it’s absolute or contingent: (1) whether there’s a reconciliation provision, (2) whether the agreement has a finite term, and (3) whether the funder has any recourse if the merchant declares bankruptcy. The reconciliation clause is the first item on that list, and how much it counts depends how it’s written.
In LG Funding the contract had a reconciliation clause. It said the funder “may, upon request, adjust the amount of any payment at its sole discretion.” The agreement also made bankruptcy or a written admission that the merchant could not pay its debts an “event of default,” allowing the funder to demand the full unpaid amount immediately and enforce the personal guaranty and confession of judgment. The court noted that these provisions suggested the funder did not assume the risk that the merchant would have lower or no revenues. That was enough for the court to leave open whether the deal was really a usurious loan.
Reconciliation clauses come in two kinds. Some agreements have one that says if the receipts are low you get a reduction in your payments - it’s absolute. But there’s another kind of clause, a ”discretionary” clause, where the funder has the right to reduce your payment at its own discretion if you ask. That means it’s up to the funder - they aren’t actually obligated to lower your payments. That is the version in LG Funding, and it is worth reading yours with that in mind. A clause like that might sound like a guarantee that if you have a down month the payments will be lower, but it may only mean you can ask.
Personal Guaranties or Confessions of Judgment
Here’s why the security matters when the business fails to pay on time. A personal guaranty means the funder can collect from you, the owner, in addition to the company. A confession of judgment is something the funder can enter as a judgment (as the LG Funding agreement allowed). Owners sometimes fight it with a motion to vacate the confession of judgment, arguing the deal was usury. In LG Funding, the court read this kind of security as a sign the funder did not take on the risk of the business failing.
Be careful what you write to the funder if you miss a payment. In the LG Funding agreement, the contract said that if you wrote a letter saying you couldn’t pay, that was an event of default, and they could make you pay everything at once and come after the personal guaranty and the confession of judgment. Make sure your contract doesn’t have a similar clause in it before you write that email.
If you’ve missed a payment on your MCA, look at three things in the agreement. First, is there a reconciliation provision, and if so is it absolute or is it left to the funder’s discretion? Second, does the agreement have a finite term? Third, has the funder reserved security like personal guaranties or confessions of judgment that protect it from the risk that your business becomes insolvent?
These questions are not going away. The LG Funding decision came down in March 2020, just as the Covid lockdowns began, although it was reviewing facts from years before. Covid has likely greatly increased the number of MCA defaults, so these questions about reconciliation clauses and usury will be with us for a while.
Don’t assume that the reconciliation clause is going to bail you out, and don’t assume it’s meaningless either. The way it’s written matters, and it matters for what you might ask a funder to do and what a court might think about the agreement. So go talk to somebody who understands these things and show them your deal.
Delancey Street was created by debt-relief professionals and former merchant cash advance industry executives. We’re a business debt settlement company, not a law firm. We work primarily on MCA debt, including stacked advances. Our job is negotiating with the MCA funder and the lender for less than the full balance of what you owe. We aren’t here to refinance you into another loan. If the case calls for litigation or bankruptcy, we will send you off to an independent lawyer. Our first call is free and confidential, and if we can see a cheaper way out we’ll tell you so.
