Understanding Your MCA Contract: Key Terms Explained

The Language Is the Architecture

The MCA contract is constructed to perform a specific legal function: to classify the transaction as a purchase of future receivables rather than a loan. Every term in the agreement serves that classification. The “purchased amount” is not a repayment obligation; it is the face value of the receivables being sold. The “purchase price” is not a loan; it is the discounted amount the funder pays for those receivables. The “specified percentage” is not an interest rate; it is the share of daily revenue that the funder is entitled to collect. Understanding the contract means understanding that the language is not describing what is happening. It is constructing what the transaction must be in order to survive judicial scrutiny.

The first term that matters is the purchased amount. This is the total the merchant will repay. If the advance is $50,000 and the factor rate is 1.4, the purchased amount is $70,000. The merchant is not borrowing $50,000 and repaying $70,000 with interest. The merchant is selling $70,000 in future receivables for $50,000 today. That is the legal fiction. Whether it survives depends on the remaining terms.

The second is the specified percentage. This is the daily or weekly amount the funder will withdraw. In most agreements we review, this figure is calculated at origination based on the merchant’s average daily revenue and does not adjust automatically if revenue changes. The reconciliation clause, which we address below, is the mechanism for adjustment. The specified percentage establishes the pace of collection.

The contract does not use the word “debt.” It does not need to. The ACH withdrawal performs the same function.

The third is the reconciliation clause. This provision permits the merchant to request an adjustment to the daily payment amount if revenue has declined. In theory, it is the contractual proof that the funder bears risk: if the business earns less, it pays less. In practice, many reconciliation clauses require the merchant to submit detailed financial documentation, wait for the funder’s review, and accept whatever determination the funder makes. The reconciliation clause in seven of the last ten contracts we examined permitted the funder to deny reconciliation requests at its sole discretion. A reconciliation clause that functions at the funder’s pleasure is, for legal purposes, a clause that may not function at all. Courts have noted this. In MCA Servicing Company v. Nic’s Painting, a Rockland County court observed that an illusory reconciliation provision undermines the characterization of the agreement as a purchase.

The fourth term is the confession of judgment. This clause, still present in many MCA agreements though now restricted in New York for out-of-state merchants, permits the funder to obtain a court judgment against the merchant without filing a lawsuit. The merchant signs an affidavit in advance, authorizing judgment to be entered in the funder’s favor upon a claimed default. The confession of judgment bypasses the adversarial process entirely.

The fifth is the personal guarantee. Many MCA agreements require the business owner to personally guarantee the obligation. This is significant because it contradicts the purchase-of-receivables framework: if the transaction is a purchase, the funder’s recourse upon default should be limited to the business’s receivables. A personal guarantee suggests the funder expects to recover from the individual, which suggests the funder is not bearing the risk the contract claims to allocate.

The sixth is the UCC filing. The funder typically files a UCC-1 financing statement, asserting a security interest in the business’s receivables (and often in “all assets”). This lien does not require the merchant’s ongoing consent. It attaches upon filing and remains until terminated. It affects the business’s ability to obtain other financing, to sell assets, and in some cases, to operate.

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Each of these terms interlocks with the others. The contract is not a collection of independent provisions. It is a machine designed to ensure repayment while maintaining the legal classification that exempts the transaction from lending regulation.

Reviewing the contract with counsel is the beginning of understanding what it permits and what it does not. That review is available as an initial consultation.