5 Illegal or Unenforceable Clauses Hiding in Your MCA Contract

The contract you signed was written by the funder's attorneys. It was not written for you.

Every MCA agreement is a document designed to maximize the funder's enforcement options and minimize the merchant's ability to resist. This is not unusual in commercial finance. What is unusual is how frequently MCA contracts contain clauses that courts have found unenforceable, that statutes have invalidated, or that, when examined in the context of the agreement as a whole, transform a purported purchase of receivables into an illegal loan. The clauses are not hidden in the sense that they are absent from the document. They are hidden in the sense that you were not expected to read them, and if you did read them, you were not expected to understand what they meant, and if you understood what they meant, you were not expected to challenge them.

The first step in challenging an MCA is reading the contract. The second is understanding which provisions are not as solid as the funder believes them to be.

The Confession of Judgment

The confession of judgment clause authorizes the funder to obtain a court judgment against you without filing a lawsuit, without notifying you, and without providing you the opportunity to defend yourself. You signed it at origination, likely on the same page as the personal guarantee, likely without understanding that you were pre-authorizing a verdict.

New York amended CPLR 3218 in 2019 to prohibit confessions of judgment based on out-of-state transactions. If your business operates outside New York and does not conduct business in New York, a COJ filed in New York may be unenforceable. The amendment was a response to years of abuse in which MCA funders, predominantly based in New York, used confessions of judgment to freeze the accounts of merchants across the country who had no connection to the state.

The amendment did not eliminate confessions of judgment. It restricted them. And the restriction has a geographic boundary that an attorney can evaluate against the specifics of your agreement and your business.

Even for New York-based merchants, confessions of judgment are vacated with regularity when the filing contains procedural defects, when the affidavit of default misrepresents the facts, or when the underlying agreement is found to be a usurious loan.

The clause feels final. It is, in fact, frequently the most vulnerable provision in the contract.

The Illusory Reconciliation Clause

The reconciliation clause is the provision that makes your MCA an MCA and not a loan. It states that your daily payment will be adjusted if your revenue declines, ensuring that the funder bears the risk of revenue fluctuation rather than imposing a fixed repayment obligation.

In theory, this clause distinguishes a purchase of future receivables from a loan. In practice, it does nothing.

The clause permitted the adjustment. The funder's process prevented it.

Funders draft reconciliation clauses that require the merchant to initiate the request, provide extensive documentation within a narrow window (often ten business days), and submit to a review process that the funder controls entirely. If the merchant's documentation is deemed insufficient, the request is denied. If the merchant misses the window, the request is deemed withdrawn. If the merchant meets every requirement, the funder may still claim the revenue decline does not meet the contractual threshold.

New York courts are now examining the actual conduct of the funder, not merely the language of the clause. Following the Yellowstone Capital settlement in January 2025, judges scrutinize whether the funder's back-office procedures made reconciliation practically impossible, a concept known as the "illusory reconciliation" trap. If the clause existed on paper but was designed to fail in operation, courts may reclassify the agreement as a loan.

If your funder denied your reconciliation request, ignored it, or imposed requirements that made compliance impracticable, the clause may be your strongest defense.

The Blanket Waiver of Defenses

Many MCA agreements include a clause in which the merchant waives the right to assert defenses or counterclaims in any legal action by the funder. The waiver is broad, often covering fraud, misrepresentation, breach of good faith, and usury.

Courts have not uniformly enforced these waivers. A waiver of the right to assert a usury defense is particularly suspect, because usury statutes exist to protect a class of parties (borrowers) from the conduct of another class (lenders). A contractual waiver of a statutory protection undermines the purpose of the statute.

In cases where the MCA is reclassified as a loan, the waiver of defenses provision may be examined as further evidence that the funder anticipated legal challenges and attempted to preempt them contractually. The presence of the waiver does not strengthen the funder's position. It reveals the funder's awareness that the agreement was vulnerable.

The Fixed Daily Payment with No Revenue Adjustment

If your MCA agreement requires a fixed daily payment (a specific dollar amount withdrawn via ACH each business day) rather than a percentage of actual daily revenue, the agreement may not function as a purchase of receivables at all.

A true MCA is repaid through a holdback: a percentage of the merchant's daily or weekly sales, deducted at the point of sale or from the merchant's processor. The payment fluctuates with revenue. The funder shares the risk of a slow week or a slow season.

A fixed daily ACH withdrawal does not fluctuate. It does not share risk. It operates identically to a fixed-payment loan, except without the regulatory protections that loans carry. Courts have identified fixed daily payments as a significant indicator that the agreement is a loan in MCA clothing.

In the Yellowstone Capital action, the Attorney General cited fixed daily debiting as evidence that the advances were loans rather than true purchases of future receivables. The same analysis applies to any agreement with this structure.

If your agreement specifies a fixed daily withdrawal amount (not a percentage), an attorney should evaluate whether the agreement constitutes a loan under your jurisdiction's usury laws.

The Personal Guarantee That Exceeds the Business Obligation

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Most MCA agreements require a personal guarantee from the business owner. The guarantee makes the owner individually liable for the full repayment obligation if the business defaults. This, standing alone, is common in commercial finance.

What is less common, and legally significant, is a personal guarantee that eliminates the funder's risk entirely. One of the three factors New York courts examine when determining whether an MCA is a loan is whether the funder bears meaningful risk. If the personal guarantee ensures that the funder recovers its investment regardless of the business's performance, the funder bears no risk. And a transaction in which one party bears no risk of loss is, by definition, a loan.

The personal guarantee does not merely expose your personal assets. It may also be the provision that converts the entire agreement from a purchase of receivables into an unenforceable loan.

This is, if we are being precise, not what the funder intended the guarantee to accomplish.

The Contract Was Written to Win. It Was Not Written to Be Right.

Every clause described above exists because it serves the funder's interests in enforcement. Each clause was drafted by an attorney whose client was the funder, not the merchant. And each clause, when examined by a court or challenged by competent counsel, has proven to be less formidable than it appears on the page.

The contract sits in your files. It has not been read by anyone whose interests align with yours. A consultation with an attorney who practices in MCA defense is the act of reading that contract through a different lens, one calibrated not to enforce the agreement but to determine whether the agreement is enforceable at all.

That determination begins with a call. The call costs nothing. What it reveals about the document you signed may be worth a great deal.