9 Terms in Your Simple Funding Agreement That Matter Once Suit Is Filed

When a merchant cash advance funder files suit against you, a handful of terms in the agreement decide how likely it is that the funder will win and for how much money. They are a personal guarantee, the forum and law clause, the confession of judgment and reconciliation clauses, the term, the bankruptcy clause, the payment numbers, and the ACH authorization. If you have been personally served in New York, the answer deadline is 20 days. For some other service methods it is 30 days.

1. What triggers the guarantee

Most merchants do not understand that, when it comes to these guaranties, your personal duty to the investor is narrow. You answer for the things you promised and for cheating on things like agreements not to divert the receipts, not to start up other borrowings, etc. The guaranty usually only kicks in on a bankruptcy, diverting receipts, or closing up shop to dodge payment. You don’t answer, though, for just not making enough money to pay off the advance.

2. Where you get sued

The forum clause tends to put the deal in New York even if you have never set foot there. These terms usually get enforced. They don’t win every time, though. Courts get squirrely about enforcing it when you can point to fraud or unreasonableness. In practice that means an annoying trip to New York, where the court system is very familiar with these kinds of deals.

3. Which state’s law applies

The law clause often puts the deal under New York law, even if you have never set foot there. There is actually a New York statute that lets the court honor those law terms so long as the deal is for at least $250,000. That one makes no mention of being connected to New York either.

4. The confession of judgment

The confession of judgment is a powerful clause that gets used as a procedural sledgehammer to slam you fast and easy. In 2019 New York stopped taking any confession of judgment against people who didn’t live or have a business in New York. If a confession that didn’t follow this rule does hit you, you get a shot to vacate it.

The confession can only be filed in your county of residence and only before the filing limit runs out. And businesses can live wherever they have a place of business. How long can the funding companies wait to file? In New York it’s three years from the day you signed. Since September 1, 2025, a sales-based financing contract with a confession of judgment clause is void in Texas.

5. The reconciliation clause

The reconciliation term lets you lower the payment to match sales. Some funders try to fake out the court by keeping it in but never honoring it. If you get sued, one sign of a loan is if the contract says they can “adjust” but never honors it. The phrasing “sole discretion” looks even more like a loan. Another sign of a fake reconciliation clause is its demand for impossible paperwork before it makes an adjustment. Courts have struck such agreements down as not being true reconciliation clauses.

The reconciliation clause can go both ways. In 2022 New York had one ruling using it to block a usury defense. A well written reconciliation clause can make the deal look and act like a purchase.

6. The length of the term

A big part of the “is it a loan or a purchase” answer turns on the term. The law looks at if the deal has a definite end date. In 2020 New York’s Second Department applied a new rule to these agreements. They set up a test with three factors, starting with a reconciliation clause and end date in the deal.

7. The bankruptcy clause

The third factor is the bankruptcy clause. If filing bankruptcy is a default that lets the funder collect anyway, that clause acts like a loan. In effect, all three put on one side means you had a loan.

8. The payment numbers

You need to ask first how much they gave you to use and then ask how much they want back. Then there is the daily payment. To see what the rates look like, you turn those into an annual rate. That matters because, when they’re over 25% on deals that act like a loan, that’s criminal usury. In New York, a criminally usurious deal is just plain void. If the loan itself is unenforceable, the guarantee that goes with it cannot be enforced either.

To run those numbers, get a copy of the funder’s suit, the merchant agreement, the personal guaranty, and all of the funding broker’s emails. Save every bank record of each withdrawal. That rate math is often the core of the defense.

9. The ACH authorization

The ACH authorization deserves a specific look as its own separate problem. The deal gives the advance company legal permission to take money out of the business’ bank account and it can keep doing so during the lawsuit. In 2025 the Texas Legislature passed HB 700, and now automatic debits from a Texas merchant account will not be allowed unless the funder holds a perfected first-priority security interest in it.

Do Not Ignore the Suit

Do not ignore the suit. These judgments come on really fast and can quickly turn into wage garnishment and personal bank account freezes. The number one thing to do is to answer before there’s any judgment. If you already have a default judgment, you may still be able to open the case back up. Within one year after being served with the judgment and notice of its entry though, you can ask to undo it for excusable reasons. In these cases, settlements before any defense run at 80-100 cents on the dollar, but after a usury defense it can be 30-50.

A free contract review costs nothing and takes a day or two. Call (888) 837-7053, or send the agreements to Delancey Street for a straight read on your options.