The Agreement Is Not What the Sales Pitch Was
What the funder described over the phone and what the revenue purchase agreement actually says are two different documents. The phone call was a sales pitch. The agreement is a legal instrument, and every section in it was drafted by someone whose professional obligation ran to the funder, not to you.
Six sections deserve particular attention. The rest is largely boilerplate.
Section 1: The Purchased Amount and Factor Rate
The agreement will identify two figures: the amount advanced and the total amount owed. The ratio between them is the factor rate, though the document may not use that term. A funder advances fifty thousand dollars. The purchased amount, meaning the total receivables the funder claims to have bought from you, is sixty-seven thousand five hundred dollars. That ratio of 1.35 is your factor rate.
What the section will not contain is an annual percentage rate. This is intentional. The industry’s entire argument for why MCA transactions are not loans rests partly on the absence of an interest rate calculation. Courts have nonetheless converted factor rates to effective APR for purposes of usury analysis, and the results are typically uncomfortable for funders. One should read the purchased amount section as a statement of total obligation, not a statement of price.
Section 2: The Remittance Clause
This section describes how the funder will collect. It is where the fixed daily ACH versus percentage holdback distinction appears in the actual contract language. Read this section twice.
If the agreement specifies a dollar amount per business day, that is a fixed daily structure. If it specifies a percentage of daily credit card receipts or deposited revenue, that is a percentage holdback structure. The practical and legal consequences of these two structures differ significantly, as courts examining loan characterization have repeatedly noted that revenue sensitivity is a defining feature of a genuine receivables purchase.
Some agreements combine both: they describe the remittance as a percentage of revenue but then specify a daily dollar amount as the “estimated daily payment.” Funders sometimes treat the estimated figure as fixed and the percentage language as decorative. When this happens, the agreement may be legally defective in the way it was actually administered, which creates a potential defense.
Section 3: The Reconciliation Provision
Reconciliation is the mechanism that theoretically makes a percentage-based MCA work as described. If your revenue declines, the reconciliation provision allows you, or obligates the funder, to adjust the daily payment to reflect what a true percentage of actual revenue would have produced.
The quality of this provision is the most litigated issue in MCA disputes. A mandatory reconciliation clause, one that uses language like “shall adjust” or “will reconcile upon merchant request,” is legally meaningful. A discretionary clause, one that uses “may” or “at funder’s sole discretion,” is, as one New York court put it, illusory. Courts have found that an illusory reconciliation provision supports characterizing the entire agreement as a loan.
The January 2025 settlement between the New York Attorney General and Yellowstone Capital, covering obligations that exceeded a billion dollars, arose partly from a pattern of reconciliation provisions that existed in the agreements but were never honored in practice.
Section 4: The UCC Filing and Security Interest
This section authorizes the funder to file a UCC-1 financing statement against your business’s receivables and, sometimes, all assets. The filing is public. It appears on your business credit profile. It signals to every other potential lender that a prior claim exists against your future revenue.
The effect is immediate and often underestimated. A UCC-1 filed by a merchant cash advance funder effectively forecloses most conventional financing options while it remains active. Banks will see the lien and decline. Other MCA funders will see it and either decline or offer worse terms. A business trying to escape one MCA by obtaining conventional refinancing will frequently find the path blocked by the lien the first MCA placed on signing day.
Section 5: The Default and Acceleration Provisions
Default is defined more broadly in MCA agreements than most merchants expect. A failed ACH debit, a single bounced payment, a change in the merchant’s primary bank account without prior notice, a material adverse change in the business, the filing of any litigation against the merchant by any party: all of these may constitute events of default under the agreement’s terms.
Upon default, acceleration provisions allow the funder to declare the entire outstanding purchased amount immediately due. In a fixed daily agreement, this may mean tens of thousands of dollars are due in full on the day a single payment bounces. Combined with a confession of judgment clause, the funder may be able to obtain a court judgment and freeze your accounts before you receive any notice that a default was even declared.
The quiet vulnerability here is that the default triggers are not always communicated at origination. A merchant who changes banks to manage cash flow may not realize that the notice requirement in the default section treats an unauthorized bank account change as a material default.
Section 6: The Confession of Judgment Clause
Where this clause exists, it is the most dangerous provision in the agreement. A confession of judgment authorizes the funder to enter a judgment against you in court without filing a lawsuit, without serving you, and without giving you an opportunity to contest. The funder submits an affidavit to a court clerk, and a judgment is entered. Your bank accounts can be frozen the same day.
New York prohibited confession of judgment clauses in MCA agreements in 2019 for merchants located outside the state. California prohibits them entirely. Other states have varying rules. Funders incorporating in friendly jurisdictions and inserting choice-of-law provisions have continued to include these clauses for transactions with merchants in states where they are prohibited. When a court determines that the governing law provisions are unenforceable or that the clause violates public policy in the merchant’s home state, the confession of judgment is void. This is a defense worth examining.
If you have already signed an MCA agreement and you are trying to understand your position, a careful reading of these six sections will tell you most of what you need to know. A first conversation with an attorney will tell you the rest, and that conversation is available without cost or commitment.
