Understanding MCA Agreements

Merchant cash advance agreements are filled with complex terms and legal jargon. The lack of regulation in the MCA industry means there’s no standardized agreement, allowing each provider to offer customized and often very different contracts.

In this article, we’ll guide you through the key terms you should understand and the crucial points to consider and things to do before signing an MCA agreement.

What Is an MCA Agreement and How Does It Work?

An MCA Agreement is a legally binding contract between you and the MCA provider. It outlines the cash advance you’re about to receive and the obligations you must meet, the fees you will be charged, repayment terms, and any guarantees you must provide.

Key Elements in Your MCA Agreements

There are a number of key elements that are included in most MCA agreements. These set the terms that the MCA provider expects you to agree to and outline your financial responsibilities and obligations. Below, we break down these common elements to make them easier for you to understand.

Effective Date

The effective date in the agreement is to let you know when the agreement becomes legally binding, usually the date when you receive the advance.

Repayment Terms

This part of the agreement outlines the repayment commitments you will be agreeing to, including the schedule, the method of deductions, and the provider’s expectations.

Factor Rate Fees

The agreement also includes the factor rate which is the main fee the MCA provider is going to charge you for the cash advance.

Origination Fees

Some MCA providers charge origination fees and will include them in the agreement. These fees are a cost charged by the MCA provider to process your cash advance.

Early Repayment Fees

Some providers may include an early repayment fee in the agreement if you repay the advance before the agreed term ends.

Renewal Options

Renewal options are sometimes included in the agreement to offer you the flexibility to extend the terms of your advance, usually at the cost of additional fees or different repayment terms.

Default and Remedies

This section of the agreement defines when you’re considered in default and outlines potential legal consequences, as well as guidance from the MCA provider on steps to take.

State Regulations

This part is less common but informs you of any state laws that could affect your agreement, as some states limit or prohibit certain clauses.

Additional Agreement Clauses You Should Be Aware Of

Processing Fees

If an MCA provider decides to charge processing fees to cover administrative costs such as paperwork and electronic processing during your repayment period, these fees will be included in the agreement. Keep in mind that these fees may not have been mentioned during the application process, so it’s important to read your agreement carefully to confirm whether or not you will incur additional processing fees as part of your agreement.

Personal Guarantees

MCA providers often include a personal guarantee clause in the agreement to limit their risk and increase their chances of repayment. While MCAs are usually unsecured, agreeing to this a personal guarantee makes you personally liable. If your business fails to repay the MCA, your personal assets like your home or savings may be at risk.

Confession of Judgements

Additional clauses like “Confession of Judgment” may be included in MCA agreements. Agreeing to this clause means you forfeit your right to defend yourself in court. If a dispute arises, the MCA provider can obtain a judgment against you without notifying you or allowing you to present your case. Agreeing to a confession of judgment can put you at both a legal and financial disadvantage if you default on your MCA.

Late Payment Fees

Repayments are usually auto-deducted daily, making late payments rare. However, some providers include late payment fee clauses triggered by technical glitches. Review your agreement to see if you could incur these unexpected costs.

Termination Fees

If there is a high likelihood that you will repay the MCA in full early, be cautious of termination fees that some providers include in the agreement. These fees can apply even when you’ve repaid the advance in full early, along with the full factor rate fee. Always check for this clause to avoid unexpected costs.

Arbitration Clauses

In some cases MCA contracts may have arbitration clauses. The two most common types are Mandatory and Binding. Mandatory Arbitration means you must resolve disputes through arbitration, not court. Binding Arbitration means the arbitrator’s decision is final, leaving you with limited legal recourse. This would put you at a legal disadvantage if you sign the agreement with an arbitration clause in it. 

Other Guarantees

MCAs are unsecured, but sometimes the MCA provider might want to fund you but might ask for additional guarantees to the advance, such as a co-signer or additional collateral. It’s important that you check to see if any additional guarantees are required from you if you sign the agreement.

Minimum Credit Card Sales Requirements

Some contracts may have a clause that states if your credit card sales drop below a certain amount, you might have to pay extra fees or a set minimum payment instead of just a percentage of your lower sales. So, be careful and keep an eye out for these terms to avoid any surprise minimum repayment obligations.

What to Do Before Signing Your MCA Agreement

Before you sign, make sure you:

1. Read the Fine Print

Take the time to thoroughly read through the agreement. This step is crucial because it allows you to understand your obligations and rights as outlined in the contract. It helps prevent any surprises or misunderstandings later on.

2. Confirm Expectations

Ensure that the terms and conditions in the agreement match what was initially offered to you. This verification is important to make certain that there are no unexpected changes or discrepancies between the initial offer and the final agreement.

3. Get Your Questions Answered

If you have any doubts or uncertainties about the terms or clauses in the agreement, it’s essential to seek clarification. Asking questions helps you fully comprehend what you’re committing to and can prevent future misunderstandings.

4. Check for Red Flags

Examine the agreement and the MCA provider’s reputation carefully. Look for any warning signs or unusual clauses that may indicate unfavorable terms or practices. It’s important to protect your interests and ensure you’re dealing with a reputable provider.

5. Consult a Business Attorney

Consider seeking legal advice from a business attorney. They can provide you with valuable insights into the legal implications of the agreement and help you navigate any complex or unclear terms. This step adds an extra layer of protection to your decision-making process.