A workout agreement is not a settlement and it is not forgiveness. It is a renegotiated set of payment mechanics that both parties sign, replacing the original agreement’s collection terms while leaving the underlying obligation alive.
What Makes a Workout Agreement Different
The distinction matters because merchants sometimes enter workout discussions expecting a reduction in principal. That outcome is possible, but it is not what a workout agreement is designed to produce. The agreement changes how and when payments move, not necessarily how much is owed in total. Confusing the two leads to disappointment and, in some cases, to signing something that does not actually help.
The Revised Payment Schedule
Every workout agreement contains a new payment structure. This might mean reducing the daily ACH withdrawal by a fixed amount, switching from daily debits to weekly ones, or setting a temporary floor below which withdrawals will not go. The mechanics vary, but the purpose is the same: to bring the daily outflow into a range the business can survive.
The schedule should be expressed in dollars and dates, not in percentages or estimated future calculations. If the funder’s draft uses language like “approximately” or “estimated based on,” the attorney should demand fixed figures. Vague payment terms are not workout agreements. They are future disputes waiting to happen.
The Reconciliation Mechanism
A real reconciliation provision binds the funder to adjust collections when revenue declines. The workout agreement should specify the trigger: what percentage decline in revenue activates a downward adjustment, how the merchant documents that decline, and within what period the funder must respond.
Many original MCA contracts contain reconciliation language that was never enforced. The workout agreement is the opportunity to replace that language with something that has teeth, with a timeline, a documentation standard, and a consequence for non-compliance.
The Default and Cure Provisions
What happens if the merchant misses a payment under the new terms? The workout agreement must answer that question before it is signed, not after the first missed debit. A well-drafted default clause gives the merchant a cure period, typically three to five business days, before the funder can declare a breach and revert to the original terms or accelerate the balance.
Funders prefer short cure periods or none at all. The attorney pushes for the longest cure window the funder will accept, because the cure period is the only buffer between a missed deposit and a judgment motion.
The UCC and Personal Guarantee Treatment
The workout agreement should address what happens to the funder’s UCC-1 filing and to any personal guarantee. If the funder holds a blanket lien on all business assets, the merchant may negotiate a partial release or a subordination agreement that permits certain financing to proceed. The guarantee provisions should be addressed explicitly, because silence on this point means the original guarantee terms remain in effect.
A workout agreement that says nothing about the UCC lien has not resolved the lien. It has only changed the payment schedule while leaving the cloud on title in place.
The Release of Claims
Funders routinely include a mutual release in workout agreements. The merchant releases any claims against the funder, and the funder releases any claims against the merchant arising from the original agreement. On its face, this seems balanced. In practice, the merchant may have viable claims, including usury defenses, reconciliation violations, or improper COJ filings, that would be extinguished by signing the release.
The attorney reviews the release language before the merchant signs anything. A release that covers “any and all claims, known or unknown” is a release of defenses the merchant has not yet identified. Limiting the release to claims arising from specific enumerated conduct is a better outcome.
The Confidentiality Clause
Funders often include confidentiality provisions prohibiting the merchant from disclosing the terms of the workout. These clauses serve the funder’s interest: if merchants shared workout terms, every merchant with a similar balance would demand the same structure. The merchant’s attorney may be able to narrow the confidentiality obligation or exclude from it any communications with accountants, attorneys, or government regulators.
Whether confidentiality is acceptable depends on the individual circumstances, and I would not characterize it as an inherently problematic term. But it should be negotiated, not accepted as a given.
A first call with a Spodek Law Group attorney costs nothing and assumes no commitment. But what you learn in that call will change how you read every paragraph of whatever workout proposal the funder sends next.
