A merchant cash advance is the sale of a portion of your business’s future revenue to a funding company at a discount, not a loan. You receive a lump sum today, and the funder collects a larger dollar amount out of your future sales over the following months. Because the transaction is legally a purchase of receivables rather than an extension of credit, the interest rate caps and federal disclosure rules that apply to loans generally don’t reach it. Business owners routinely end up paying an effective annualized cost between 60% and over 100%, and the contract terms that make that possible are the parts most people don’t read carefully before signing.
Why It’s Structured as a Sale Instead of a Loan
The whole legal architecture rests on one idea: the funder is buying an asset from you (a slice of your future revenue) rather than lending you money that accrues interest. There is no principal balance, so technically there is no interest rate, and the transaction sits outside the definition of a loan in most jurisdictions.
That classification has real consequences. Usury laws that cap interest rates apply to loans, not to sales of receivables. Federal Regulation Z, which implements the Truth in Lending Act and requires lenders to disclose APR and other cost information, exempts credit extended primarily for business or commercial purposes.1CFPB. 12 CFR 1026.3 – Exempt Transactions An MCA goes further, because it isn’t credit at all under the contract; it’s a sale.
The catch is that the sale label only holds up if the funder actually accepts the risk that your business could fail and produce no revenue to collect from. If the contract guarantees payment regardless of what happens to the business, courts can look past the labels and treat the deal as a loan, which exposes the funder to usury penalties. That risk-transfer question is what merchant lawsuits over MCAs almost always turn on.
The Contract Terms You’ll See First
MCA contracts use their own vocabulary, most of which appears in a summary table on page one:
- Purchase price is the money deposited into your account.
- Purchased amount (sometimes called “receipts purchased”) is the total dollar value of future sales the funder is entitled to collect. It’s always larger than the purchase price; the gap is the funder’s profit.
- Factor rate is a decimal multiplier applied to the purchase price to produce the purchased amount. Most agreements use factor rates between 1.15 and 1.45. A $100,000 advance at a 1.30 factor rate means you owe $130,000 in collections.
- Holdback (or “specified percentage”) is the share of daily revenue the funder collects, usually 5% to 20%. A 15% holdback takes 15 cents of every dollar the business brings in until the purchased amount is fully collected.
Read the definitions section further into the document too. Some contracts define “revenue” or “receipts” broadly enough to include more than credit card sales, which changes what actually gets swept.
What a Factor Rate Really Costs
Factor rates read as smaller than they are. A 1.30 factor sounds like 30% on top of the advance, and in raw dollars it is: borrow $100,000, pay back $130,000. But because MCA repayment periods run short, often four to twelve months, the annualized cost is far higher than the factor rate suggests.
Take a $100,000 advance at a 1.28 factor rate repaid over six months. Total payback is $128,000, meaning $28,000 for six months of capital. The effective APR exceeds 100%. Stretch the same factor rate over twelve months and the effective APR drops to roughly 60%. Add origination fees, commonly 2% to 5% of the advance, and the numbers climb further. A traditional SBA loan by comparison might sit in the low teens. The factor rate format makes side-by-side comparison difficult, which is one reason a growing number of states now require funders to disclose an annualized cost.
How the Money Gets Collected
Funders pull their receivables through one of two automated methods, and the choice shapes how your daily cash flow behaves.
ACH debits are more common. The funder withdraws a fixed daily or weekly amount from your business bank account, calculated from projected revenue at the time you signed. If sales drop, the same dollar amount still leaves your account.
Credit card split funding routes the holdback through your payment processor. Before you see your credit card revenue, the processor diverts the agreed percentage to the funder and deposits the rest with you. This method self-adjusts to sales volume: slow week, less collected; busy week, more.
The difference matters most when revenue dips. Split funding adjusts automatically. With ACH debits, you have to invoke your reconciliation rights to get any adjustment at all.
Reconciliation
Most MCA contracts include a reconciliation clause letting you request a payment adjustment when actual revenue falls below the projections that set the daily ACH amount. On paper, this is what keeps the deal from becoming a fixed-payment obligation (which would look legally identical to a loan). In practice, exercising the right can be difficult.
You typically have to submit bank statements or point-of-sale reports proving the shortfall, and many agreements impose tight deadlines, sometimes ten business days. Miss the window and the request may be deemed withdrawn. When funders make reconciliation available on paper but effectively impossible to use, courts have treated the clause as illusory and pointed to it as evidence the deal is really a loan.2United States Bankruptcy Court, Northern District of Florida. Merchant Cash Advance Claims in Bankruptcy
Personal Guarantees, UCC Liens, and Confessions of Judgment
Despite the sale-of-receivables framing, most MCA agreements require the business owner to sign a personal guarantee. If the business can’t produce enough revenue to cover the purchased amount, the funder can pursue the owner’s personal assets: bank accounts, real property, vehicles, wages. A guarantee effectively strips away the liability shield that an LLC or corporation would otherwise provide. Broad, absolute guarantees are one of the features courts have pointed to when reclassifying an MCA as a disguised loan, but that observation doesn’t stop the guarantee from being enforced in the meantime.2United States Bankruptcy Court, Northern District of Florida. Merchant Cash Advance Claims in Bankruptcy
Nearly every MCA contract also grants the funder a security interest in your business assets, perfected by filing a UCC-1 financing statement with the state. Many funders file blanket liens covering not just future receivables but inventory, equipment, accounts, and other property. Some file immediately; others hold the filing and record it only on default. Either way, a UCC-1 on public record signals to other lenders that your assets are already pledged. Banks and SBA lenders reviewing your file may decline further financing or require subordination agreements first. The MCA meant to bridge a temporary cash gap can end up blocking access to cheaper, longer-term capital. And even after payoff, the UCC-1 stays on record until the funder files a termination statement, which doesn’t always happen promptly.
Confessions of Judgment
Some MCA contracts include a confession of judgment: a pre-signed document letting the funder obtain a court judgment against you without filing a lawsuit and without giving you a chance to respond. The funder files the document with the court, and a judgment is entered.
For years, funders exploited New York’s permissive confession of judgment rules to obtain instant judgments against out-of-state merchants who had no realistic way to appear in a New York court to contest them. In 2019, New York amended CPLR 3218 to prohibit filing confessions of judgment against out-of-state debtors. Proposed legislation would further restrict confessions of judgment for debts under five million dollars regardless of where the debtor is located.3New York State Senate. Senate Bill S2305 If your contract still contains a confession of judgment clause, know what you’re agreeing to: you may be waiving your right to defend yourself before any judgment enters.
What Triggers Default and What Happens Next
Default under an MCA is easy to trigger. The most common cause is a failed ACH withdrawal for insufficient funds, but contracts define default broadly. Changing your bank account without the funder’s written consent, letting the account dip below a minimum balance, filing for bankruptcy, or defaulting on a separate MCA through a cross-default clause can all count.
Once default is declared, several enforcement mechanisms activate at once:
- Acceleration makes the entire remaining purchased amount due immediately, not just the missed payment.
- UCC lien enforcement lets the funder notify your customers and payment processors to redirect payments away from your business.
- Restraining notices tied to the UCC lien can freeze your business bank accounts and, if you signed a personal guarantee, your personal accounts.
- The funder can file breach of contract and unjust enrichment claims against the business and against you personally as guarantor.
- Where confessions of judgment are still enforceable, the funder files the pre-signed document and gets a judgment without a hearing.
The FTC has occasionally acted against MCA funders for particularly abusive collection practices, including unauthorized withdrawals; in one case the agency permanently banned an MCA operator from the industry and ordered more than $2 million in restitution.4FTC. FTC Case Leads to Permanent Ban Against Merchant Cash Advance Owner Deceiving Small Businesses Federal actions like that are rare. Most enforcement plays out in state court between the funder and the merchant.
Stacking Multiple Advances
Stacking means taking out a second, third, or fourth MCA from different funders before the first is paid off. Each new advance adds another daily holdback, and the combined deductions compound fast. A business running a 15% holdback on one and 12% on another gives up 27% of daily revenue before rent, payroll, or suppliers. Add a third and the math stops working.
Stacking also creates legal exposure. Most MCA contracts contain covenants prohibiting additional financing without consent. Taking a second advance without permission triggers default on the first, even if payments on both are current. Cross-default clauses let a default on one MCA cascade into defaults on all of them. The second-position funder is also taking on higher risk and prices accordingly, so each successive advance costs more than the last. Businesses that enter the cycle rarely climb out through revenue growth alone.
State Disclosure Rules
Federal lending disclosure laws don’t apply to commercial-purpose transactions, and because MCAs aren’t loans, there has historically been no requirement for funders to tell you the annualized cost in terms comparable to other financing.5eCFR. 12 CFR 1026.3 – Exempt Transactions That gap is narrowing. Roughly a dozen states have enacted commercial financing disclosure laws requiring MCA funders to provide standardized disclosures when they extend an offer.
Details vary by state, but the disclosures commonly cover total funds provided, total dollar cost of financing, estimated repayment term, payment method and frequency, prepayment policies, and total cost as an annualized rate. The recipient must sign the disclosures before the deal can be finalized. If you operate in a state with these rules and your funder didn’t provide a disclosure document, treat that as a warning sign worth investigating before you sign.
What to Check Before You Sign
The summary table on page one doesn’t tell you what you need to know. The provisions that create the most trouble sit deeper in the contract. Before signing, get answers to these:
- Is the reconciliation clause realistic? Look at the specific process, timeline, and documentation. If you have ten days to produce records, make sure you can actually meet that.
- What triggers default? Changing bank accounts, missing a minimum balance, or taking on additional financing without consent are common triggers that have nothing to do with missing a payment.
- Does the contract contain a confession of judgment? If so, understand what you’re pre-authorizing, and check whether it’s enforceable in your state.
- What does the personal guarantee cover? Some are limited to the business’s performance under the agreement. Others are absolute, making you personally liable for the full purchased amount regardless.
- What does the UCC-1 filing cover? A lien limited to future receivables is narrower than a blanket lien over all business assets. Know which you’re agreeing to.
- Is there a prepayment discount? Some contracts require the full purchased amount even on early payoff, so there’s no benefit to paying ahead. Others offer a modest discount.
Speed is the MCA’s main selling point, and it also creates pressure to sign without reading. Funders who push for same-day signatures and resist questions about contract terms are the ones most likely to enforce those terms aggressively later. An extra day for a review is almost always worth the delay.