How to read an MCA contract —
line by line.

MCA contracts are structured as the sale of a defined dollar value of future receivables, not as loans. That distinction drives the entire document. A loan contract talks about principal, interest, and amortization. An MCA contract talks about a "purchase price" paid today and a "purchased amount" the merchant is selling. The legal architecture exists primarily because state usury laws — which cap interest rates on loans — do not apply to the purchase of receivables. Read the document with that frame in mind and every clause makes sense.

The opening recitals

The first page of every MCA contract names the parties (the "Seller" or "Merchant" and the "Buyer" or "Purchaser") and recites that the merchant is selling, and the funder is buying, a specified dollar value of the merchant's future receivables. The recitals also frequently include language stating that the parties have negotiated the purchase, that the transaction is not a loan, and that the merchant acknowledges the risk of non-payment shifts to the buyer. This language is deliberate — it's the foundation for the legal argument that usury laws don't apply — and it's worth reading because every dispute that ever reaches a courtroom starts with whether the underlying transaction is properly characterized as a sale.

Purchase price, purchased amount, and specified percentage

The economic core of the contract sits in three numbers. Purchase priceis what the funder is paying — the amount wired to the merchant on funding day, often net of an origination fee. Purchased amount is the total dollar value of future receivables the merchant is selling — the eventual total payback. Specified percentage is the holdback rate — the percentage of daily receipts the merchant agrees to remit until the purchased amount is delivered.

On a representative deal: purchase price $50,000, purchased amount $70,000, specified percentage 12%. The merchant is selling $70,000 of future receivables for $50,000 today, and remitting 12% of daily receipts until $70,000 has been delivered. The factor rate is implicit (1.40), and the term is approximate, dependent on actual revenue performance.

Daily debit amount and how it relates to the percentage

Most modern MCA contracts replace the variable-percentage holdback with a fixed daily debit amount — a specific dollar figure ACH'd from the merchant's account each business day. The contract still references the specified percentage as the "true-up" mechanism, but the operational reality is a fixed dollar pull. On the same $50,000 / $70,000 / 12% deal, the daily debit might be set at $400, which approximates 12% of an estimated $3,333 average daily deposit base.

The flip from variable percentage to fixed dollar is the most important practical shift in MCA mechanics in the last decade. It makes the funder's cash flow predictable but also makes the merchant's cash flow predictable, which is the double-edged sword: when revenue dips, the fixed debit doesn't dip with it. The reconciliation clause is the mechanism that's supposed to restore the original holdback math when revenue moves.

The reconciliation clause

Reconciliation is the clause that, on paper, makes the MCA structure legally defensible as a true purchase of receivables. The argument is that the merchant isn't obligated to pay a fixed amount on a fixed schedule (which would look like a loan) — the merchant is obligated to remit a percentage of actual receipts. The reconciliation clause is what bridges the daily fixed debit back to the percentage.

A typical reconciliation provision reads something like: upon written request from the merchant accompanied by current bank statements and processor reports, the funder will reduce the daily debit to reflect actual receipts at the specified percentage, with the missed amount added to the back end of the schedule. The procedural requirements matter. Some funders require 5 business days notice; some require notarized statements; some require the reconciliation to be requested within a specific window after the revenue drop. If the merchant doesn't follow the procedure, the reconciliation is denied and the daily debit stays where it was. The clause is real, but it's procedural.

Performance versus prepayment

Because an MCA is structured as a sale of receivables rather than a loan, there is no "prepayment" in the traditional sense. The funder has bought a fixed dollar amount; if the merchant delivers it ahead of schedule, the funder gets the full amount earlier. Some contracts include a discounted payoff provisionthat reduces the purchased amount if paid in full within a defined window — for example, 6% off if paid within 30 days, 4% off within 60 days. Many contracts have no such provision and the merchant pays the full purchased amount regardless of timing.

When negotiating a contract, ask whether a discounted-payoff provision exists and, if so, what the discount curve looks like. The difference between "no early payoff benefit" and "a 6% discount in the first 30 days" can be $3,000 to $5,000 on a $50,000 deal — meaningful money that's almost never highlighted at closing.

Confession of Judgment

A Confession of Judgment, where included, is signed at the same time as the main contract and notarized separately. It authorizes the funder, upon a sworn affidavit of default, to enter judgment against the business and the personal guarantor in New York state court without notice or trial. New York reformed its COJ law in 2019, limiting enforcement of New York COJs against out-of-state defendants. The practical effect is that COJs against businesses with no New York operations are now largely unenforceable, but COJs against businesses with any New York presence — a registered agent, an office, a customer, an employee — remain a serious risk.

If you are signing an MCA contract that includes a COJ and your business has no New York connection, ask the funder to remove it. Many funders will. The clause exists because it once worked nationwide; the post-2019 reform has degraded its utility against out-of-state merchants enough that some funders have stopped insisting on it. The ones who still insist may have a portfolio of in-state files where the COJ matters, and they include it on every contract by default.

UCC filings and security interests

Every MCA contract authorizes the funder to file a UCC-1 financing statement covering the merchant's receivables, accounts, and proceeds. The UCC-1 is filed with the secretary of state in the merchant's state of formation. It's public, it's searchable, and any future lender who pulls a UCC search will see it.

The contract typically also includes a "negative covenant" prohibiting the merchant from granting a competing security interest in the same collateral until the advance is paid off. In practice, this is the contractual hook funders use to argue that stacking — taking a second advance without paying off the first — is a breach of contract. The UCC filing puts the second funder on notice; the contract makes the first funder's claim primary.

Personal guarantee

The personal guarantee is signed by every individual with material ownership of the business — typically anyone with 20% or more, though some funders require all principals regardless of percentage. The guarantee makes the individual personally liable for the full purchased amount plus default fees, attorneys' fees, and collection costs. It typically waives standard procedural defenses (notice, demand, presentment) and survives changes in ownership of the business.

The single most important thing to read in the guarantee is the scope of liability. Some guarantees are limited to the purchased amount. Others extend to "any and all obligations" of the business, which can sweep in fees and costs that significantly exceed the face amount of the advance. The guarantee should also be reviewed for jury trial waivers and arbitration clauses — both of which are standard but worth being aware of.

Default triggers

MCA contracts list default events with precision. The standard triggers are: two (sometimes one) consecutive bounced ACH debits; closure or material change of the business bank account without notice; change of merchant processor without notice; taking a new advance from another funder without consent; transferring or encumbering business assets; bankruptcy filing; misrepresentation in the application; and breach of any other covenant in the contract.

The list matters because each item is a trip-wire. Some merchants assume that as long as the daily debit clears, the contract is in good standing. The reality is that changing your bank account or your processor without notifying the funder is independently a default — even if every debit clears on time. Read this section carefully and operationally; treat the listed events as a checklist of things to avoid or notify on.

Choice of law and venue

Almost every MCA contract names a specific state — usually New York, occasionally Delaware or Florida — as the choice of law and exclusive venue for disputes. The merchant agrees that any litigation must be brought in that state. The practical effect is that if you are a California restaurant and the contract names New York as venue, you will defend a collection action in New York if it comes to that. Travel cost, local counsel, and unfamiliar procedural rules all favor the funder.

Venue and choice of law are occasionally negotiable on larger deals but almost never on commodity transactions. The merchant's leverage is at the front of the deal, before signing. Once the contract is executed, the venue is locked.

What to flag before you sign

A practical pre-signing checklist: confirm the purchase price, purchased amount, and daily debit amount match the offer letter; read the reconciliation procedure and make sure the documentation requirements are achievable; check whether a COJ is included and ask for removal if you have no New York connection; review the default trigger list and note which operational changes require funder notice; confirm the personal guarantee scope and look for any extension beyond the purchased amount; check choice of law and venue; and ask whether a discounted payoff provision exists. Twenty minutes of reading before signing prevents most of the disputes we see at our workout desk after the fact.