A merchant cash advance contract usually runs in the same order: the parties and the purchase price, the purchased amount and factor rate, the specified percentage and the set payment, the payment schedule and the account it comes from, the fees, any reconciliation and early payoff terms, the promises you make while the advance is open, the events of default, the security agreement and guarantee, and the clauses on governing law, courts and arbitration. In many states a standard cost disclosure comes with the offer too. Read it in that order, check each number against the offer letter and your bank statements, and use the checklist at the end for the call with the funder or with us.
The example throughout is a $50,000 advance at a factor rate of 1.45, the same numbers as the sample offer letter further down.
How a merchant cash advance agreement is put together
The packet you sign is usually several documents in one: an offer summary (with a state disclosure form in front of it where the law requires one), the purchase agreement with the numbers, a security agreement, a guarantee signed by the owner and an authorization to debit your bank account. The documents refer to each other, so a term defined on page 2 can decide what a clause on page 9 means. If a page mentions a schedule or exhibit you were not sent, ask for it before signing.
Parties and purchase price
Start with the names. The seller should be your business under its exact legal name, with the right entity type and the state it was formed in, because that name is what the funder will later file and search under. The owner usually signs twice, once for the business and once as guarantor.
The purchase price is the amount you receive in exchange for a share of your future receipts, $50,000 in the example. It is not always what reaches your bank account. A $1,500 origination fee taken out at funding leaves $48,500, and on a renewal the balance of your old advance comes out too. Look for a line labeled net funding or amount disbursed. Our glossary of merchant cash advance terms defines each of these figures if a contract uses a word you have not seen.
Purchased amount, factor rate and the specified percentage
The purchased amount is the total of future receipts you agree to deliver. At a factor rate of 1.45, the $50,000 purchase price becomes $72,500, so the advance costs $22,500 plus the $1,500 fee, or $24,000 in all. The factor rate does not change with time, so that total stays the same whether the advance takes five months or eight, unless the contract offers an early payoff discount.
The specified percentage, often called the holdback, is the share of your receipts the funder is buying, and the contract uses it to size the set payment. In the example it is 12%, and the payment is about $604 each business day. You can work backwards from those two figures to see what the funder assumed about your sales: $604 divided by 0.12 is about $5,033 in receipts per business day, or roughly $105,700 a month over 21 business days. If your statements show a lot less, the payment will take a bigger share of your sales than the contract's percentage suggests, so raise it before signing.
Payment schedule and the named account
Most advances take a set payment each business day or once a week by ACH until the purchased amount is delivered. Check whether "daily" means business days or calendar days, and which weekday a weekly debit lands on. Our post on merchant cash advance daily and weekly payments works through both schedules.
The contract will name one business bank account, often by account number, and the debit authorization is tied to it. Make sure it is the account where your sales actually land, because most contracts ask you to keep depositing there for as long as the advance is open.
Fees listed in the merchant cash advance contract
Fees usually sit on a schedule near the payment terms or at the back of the agreement, and several apply only when something goes wrong. The common ones are:
- An origination or underwriting fee, taken out of the purchase price at funding.
- A returned payment fee charged each time a debit comes back unpaid, on top of whatever your own bank charges.
- A fee for blocking a debit or changing the account without consent, which can be larger than the returned payment fee.
- Smaller charges such as a wire fee, a UCC filing fee or a monthly account fee.
- Default fees or collection costs, sometimes written as a percentage of the remaining balance rather than a dollar amount.
Add every fee you expect to pay to the $22,500 cost from the factor rate. That dollar total, against the cash that reaches your account, is the figure to use when you compare business loan offers of different types side by side.
Reconciliation and early payoff terms
Many contracts include a reconciliation clause, which compares what the funder collected through the set payment with the specified percentage of your actual receipts over a period, then settles the difference. It is a term to ask about before signing. Check who can start it, how often, what documents the funder wants and whether the difference comes back as a refund or a lower payment. Our post on merchant cash advance reconciliation walks through a request in dollars.
Early payoff terms decide whether clearing the advance ahead of schedule lowers the total. Without a discount written into the contract, paying early ends the debits sooner and the $72,500 stays $72,500. With one, the contract usually sets a lower figure for each window you pay off in. Ask for the schedule in writing, and read our post on MCA early payoff for how the common discount structures work out.
What you promise while the advance is open
Covenants are the promises the business makes for the life of the advance, and the default section usually lists breaking one as an event of default. The ones that come up most often:
- You keep depositing your receipts into the named account and do not open a new one for sales without the funder's written consent.
- You do not block, stop or reverse the funder's debits.
- You do not take another advance or loan against the same receipts without consent, which is the anti-stacking clause.
- You give notice before you sell the business or a large part of its assets, move, change its name or entity, or close.
- The information on your application and bank statements is true, and you send updated statements when asked.
If you expect to switch banks, open a second location with its own account or take more funding while the advance is open, raise it now and ask how consent is given in writing.
Events of default and remedies
The default section lists what counts as a breach and what the funder can do after one. Typical events include a blocked debit, moving deposits to another account, stacking without consent, selling the business without notice and giving false information. Some contracts also list a run of returned payments, so check whether a missed payment on its own is a default or only one that follows a breach of a covenant.
Remedies usually include making the whole unpaid balance due at once, adding default fees, enforcing the guarantee and using the funder's rights under the security agreement against the receivables it bought. If a short stretch is coming, call the funder before the debit date.
Security agreement, UCC filing and personal guarantee
Article 9 of the Uniform Commercial Code covers sales of accounts and payment intangibles as well as loans, under UCC section 9-109, so a funder that buys your receivables uses the same filing system as a lender. Signing the security agreement also authorizes the funder to file a UCC-1 financing statement covering the collateral it describes, under UCC section 9-509. Check whether the collateral is limited to receivables or covers all business assets, since a later funder or lender will see that description when it searches your name. Our UCC lien guide explains how filings are searched and released after payoff.
The guarantee is usually a separate page signed by each owner. Read whether it guarantees the business's performance of its promises, the payment of the balance, or both, and which events trigger it. Our post on the merchant cash advance personal guarantee covers the difference and what it means for your own assets.
Governing law, courts, arbitration and jury waiver
Near the end, the contract names the state whose law applies and the courts where a dispute will be heard. Many also include a jury trial waiver, under which a judge rather than a jury decides any case, and some send disputes to arbitration. Check which state and county are named, whether arbitration is required, where hearings take place and who pays the arbitrator.
Some states limit these clauses. For sales-based financing covered by Virginia's law, Virginia Code section 6.2-2234 requires any lawsuit under the contract to be brought in a Virginia court, bars face-to-face arbitration outside the jurisdiction of the business's principal place of business, and has the provider pay the arbitrator's fees and expenses.
A few contracts also include a confession of judgment, a signed statement that lets the funder have a court enter judgment for a stated sum after a default without first filing a lawsuit. Virginia's same section makes these unenforceable in sales-based financing contracts. New York's CPLR 3218 lets one be filed only with the clerk of the county where the signer lived when signing or lives at filing, and treats a business as living wherever it has a place of business.
The state cost disclosure that comes with the offer
Several states require the provider to give you a standard cost disclosure before you sign, when the deal falls under their law. Every figure on it should match the contract, and if one does not, ask which document is right before you sign either.
- New York's regulation, 23 NYCRR Part 600, sets out a table for sales-based financing with rows that include Funding Provided, Finance Charge, Estimated Total Payment Amount, Estimated Payment, Payment Terms, Estimated Term, Prepayment and Collateral Requirements. On a renewal it asks whether the new funding pays any unpaid charges or fees from the old one. The provider must get your signature on the disclosure before the deal closes.
- California's regulation, 10 CCR section 914, uses a similar table for sales-based financing, starting with Funding Provided and the funds you receive after deductions.
- Florida's section 559.9613 requires a written disclosure at or before closing of the total funds provided, the funds disbursed after fees and payoffs, the total to be paid, the total dollar cost, the manner, frequency and amount of each payment, and any prepayment costs or discounts.
- Utah's section 7-27-202 lists nearly the same items and requires them before the transaction is completed.
Florida's and Utah's lists also point you to the paragraph of the agreement that covers prepayment. In a state without a disclosure law, ask for the same figures in writing anyway.
Questions to ask before you sign a merchant cash advance contract
Take these into the call, in contract order:
- How much reaches my account after the origination fee and any payoff, and which other fees come out at funding?
- What is the purchased amount, and what is the total cost in dollars once every fee is added?
- What specified percentage and what daily or weekly receipts did you use to set the payment?
- What does each returned payment cost, and what does a blocked debit or an account change cost?
- Is there a reconciliation clause, who can start it, and what records do you need?
- Is there an early payoff discount, and can I have the schedule in writing?
- What do I need consent for while the advance is open, such as a new bank account, more funding or a sale of the business?
- Does a missed payment on its own count as a default, and what becomes due if one happens?
- Does the security agreement cover only receivables or all business assets, and does the guarantee cover performance, payment or both?
- Which state's law and courts apply, is arbitration required, and is there a confession of judgment?
- Does every figure on the state disclosure match the contract?
This article is general information rather than legal advice, and an attorney can review a specific contract with you.
How we go through an offer with you
When you apply, one application goes to the funders in our network that work with businesses like yours, and the offers come back side by side. We go through every offer with you before anything is signed, section by section. Revenue-based financing through us runs from $5,000 to $2,000,000, and most applicants are funded within one to two business days of choosing an offer. The funders we work with generally look for about a year in business and about $20,000 a month in deposits. If you're not there yet, apply anyway, because some funders work with newer or smaller businesses and we'll tell you what's realistic.
If you already hold an offer, send it to us and we'll read it with you and shop it, as our post on how we beat your MCA offer explains. To start fresh, apply online with four months of business bank statements, or call (818) 351-0225. There is nothing to pay to apply or to see offers.
Questions about merchant cash advance contracts
What is a merchant cash advance agreement?
A merchant cash advance agreement is the contract in which a business receives a lump sum, the purchase price, in exchange for a larger amount of the business's future receipts, the purchased amount, and delivers it through a set daily or weekly payment from a named bank account, under the fees, covenants, default terms, security agreement and guarantee written into the contract.
Can I negotiate the terms of a merchant cash advance contract?
Often you can, because an offer is one funder's price for your file, and a weekly instead of daily schedule, an early payoff discount or a lower fee are common things to raise, especially with a competing offer in hand.
Which states require a disclosure with a merchant cash advance offer?
New York, California, Florida and Utah are among the states that require a standard cost disclosure on the business financing their laws cover, merchant cash advances included, showing figures such as the funding provided, the funds disbursed after fees, the total to be paid, the payment amount and frequency, and any prepayment costs or discounts.
What happens if I sell my business while an advance is open?
Many merchant cash advance contracts require notice before a sale of the business or most of its assets and list a sale without notice as an event of default, so tell the funder early and ask for a payoff letter so the balance can be settled at closing.
