Why is a confession of judgment in a merchant cash advance dangerous?

Small business owners have been frantically searching for money to make payroll, pay vendors, buy supplies, and fill other gaps. At that point, some of them went with a merchant cash advance, a controversial type of financing that I’ll call by the industry term, MCA. If you ask someone in the MCA world how the business model works, they’ll usually describe it as a purchase of the future receivables of a business. That would seem like a loan, but it’s not framed that way. Because they are not loans, MCA providers don’t have to meet the same regulatory requirements as traditional lenders. Some MCA providers demand a confession of judgment from borrowers before they can receive funds.

Payments are pulled from the business checking account, sometimes every day. At first you may feel relieved, but then some unpredictable events happen: maybe the weather is terrible, a family member has an emergency, or a key employee suddenly quits. All of these things that could have been weathered if it weren’t for the payments you had committed to make. A small business may end up taking out multiple advances from various companies over time. If you find yourself taking out another advance, you’re taking steps toward being trapped in a form of indentured servitude.

A Clause Called a Confession of Judgment

Say you need to make payroll but your bank says no, the PPP is long gone, and no other options work. In your desperation, you sign terms you probably didn’t fully understand, for an advance you desperately need. What you might have missed is the confession of judgment clause. This is a dangerous clause that allows the lender to sue you without any proof of default. If the lender claims you haven’t paid, then that claim is automatically true in a court of law and they don’t have to prove you didn’t pay. Before you sign that agreement, you’ve already given up your right to defend yourself. It’s a bit like some arbitration agreements you find in user agreements, but in practice they always just cut against the merchant.

When an MCA lender comes to collect, they can get a court order to freeze your business accounts before you even know what happened. But you already confessed you owe the money, so there’s no battle. It gets worse. If the lender knows your payment processor, they can skim your card revenues until you pay in full. And then pile on the late fees, attorney fees, and penalties to finish the business.

You may have put everything on the line to keep your business going. You may also assume that your personal assets are shielded. But the documents you signed may include personal guarantee clauses that open the door for lenders to come after your personal property.

Debt Settlement

If you think the answer is just to get more financing, be careful. That loan can make things worse, adding fees and payments on top of what you’ve got. There’s another option, a legal path called debt settlement. It works differently, paying a percentage of the balance on each debt while lowering total monthly payments. But there’s a catch: this method has a lasting negative impact on your ability to access credit in the future.

Agreed Judgment

The confession of judgment clause may go by other names, and sometimes it’s called an “Agreed Judgment.” Read carefully any provision that asks you to admit that a certain claim by the lender is automatically true. So before you sign the agreement, read the fine print and don’t let the pressure cause you to rush.