Merchant Cash Advance (MCA) agreements have become a popular alternative funding option for small businesses in California, New York, and Pennsylvania. Unlike traditional loans, MCAs provide businesses with upfront cash in exchange for a percentage of their future receivables. While they can be a lifeline for businesses in need of immediate capital, these agreements come with legal terms and implications that every business owner should understand before signing.
Here, our Omni Law, P.C., business and corporate law attorneys explain.
Key Legal Terms in MCA Agreements
MCAs are financial arrangements in which a funding company provides a lump sum of cash to a business. In return, the business agrees to repay the advance through a percentage of its daily credit card or sales transactions until the amount is fully repaid, along with fees. Unlike loans, MCAs are not subject to traditional lending regulations, which can make them both flexible and risky. Understanding the legal terms of an MCA agreement is essential to avoid pitfalls and protect your business.
Here are the most critical terms to look for:
- Purchase and Sale of Receivables
MCA agreements are structured as a sale of future receivables rather than a loan. This distinction means that repayment is contingent on your business’s sales performance. If your sales decline, your repayment amount adjusts accordingly, but it also means the funding company takes on more risk.
The factor rate is a multiplier that determines the total amount to be repaid. For example, if the advance is $50,000 with a factor rate of 1.3, the total repayment will be $65,000. It’s important to note that factor rates are not the same as interest rates, and their effective cost can be much higher.
- Confession of Judgment Clause
This clause allows the funding company to obtain a judgment against your business without notice if you default. It’s a powerful tool for the lender and a significant risk for borrowers. While this clause is not enforceable in every state, it’s commonly included in MCA agreements.
Repayment in MCAs is typically deducted daily or weekly from sales. Understanding how repayments are calculated and their impact on cash flow is crucial.
Default provisions outline what happens if your business fails to meet its repayment obligations. This may include penalties, additional fees, or immediate balance repayment. Make sure to review these terms carefully.
Some MCA agreements require business owners to sign personal guarantees, putting their assets at risk in the event of default. This can have profound financial implications, so weighing the risks is essential.
How Omni Law Can Help
At Omni Law P.C, our corporate and business law attorneys in California, New York, and Pennsylvania are here to help you navigate the complexities of MCA agreements.
Our services include:
- Contract Review: We thoroughly review MCA agreements to identify potential risks and ensure fair and transparent terms.
- Negotiation Assistance: We help businesses negotiate more favorable terms to reduce financial strain.
- Dispute Resolution: We provide skilled representation to protect your business’s interests if disputes arise.
Merchant Cash Advance agreements can provide much-needed funding but are not without risks. Understanding the legal terms and potential pitfalls is critical to making an informed decision. Whether you need help reviewing an MCA agreement or resolving a dispute, Omni Law P.C is here to guide you every step of the way. Contact Omni Law today to schedule a consultation and protect your business’s financial future.
