Read your own contract tonight.

The product

• Merchant cash advance (MCA)

  A lump sum paid to a business today in exchange for a larger fixed amount of its future revenue, collected through automatic daily or weekly withdrawals. It is legally structured as a purchase of receivables, not a loan, which is how it has largely avoided usury caps and lending regulation. How MCAs really work.

• Factor rate

  A fixed multiplier, typically between 1.1 and 1.5 per NerdWallet, 2025, that sets the total you owe on the day you sign. Borrow $50,000 at 1.4 and you owe $70,000. It never changes, so paying faster saves nothing: it only raises the effective annual rate. Convert your factor rate to a real APR.

• Holdback (specified percentage)

  The share of daily revenue the contract entitles the funder to collect, commonly 10 to 20 percent of daily sales per NerdWallet, 2025. In practice most modern MCAs skip the metering and pull a fixed dollar amount by ACH every business day, estimated from your past revenue. What you actually agreed to.

• Receivables purchase agreement

  The contract behind an MCA. It frames the deal as the funder buying a slice of your future receivables at a discount rather than lending you money. Whether that framing holds up in court is the central legal question of the industry. When an MCA is really a loan in disguise.

• ACH debit

  An automatic electronic withdrawal from your business bank account, authorized in the contract, pulled each business day or week. The fixed daily draft is the mechanism that breaks businesses: it takes the same amount on your worst day as on your best. What to do when you cannot cover the drafts.

• Purchase price and net funds

  The purchase price is what a funder agrees to pay for a share of your future revenue; net funds are what actually reach your account after fees are deducted before the wire. You deliver the full purchased amount either way, so dividing that amount by the net funds shows what each usable dollar really costs. Reading the first page of your agreement.

• Position

  Industry shorthand for one advance’s place in line against your revenue. The first-position funder was there first; second and third positions stacked on later. Each position is its own contract, its own daily draft, and its own lien, and each is renegotiated on its own. How positions are renegotiated.

How the trap compounds

• Stacking

  Taking a second, third, or fourth advance while the first is still being repaid, usually to cover the earlier advances’ payments. Each new position adds its own daily draft and lien claim, and the combined pull can exceed a business’s entire margin. Why stacking sinks businesses.

• Renewal

  A funder’s offer of fresh capital once an advance is roughly half repaid. The new advance pays off the old balance, including the unearned part of the old fee, then charges a full new factor rate on the whole amount, so you pay a fee on money used to pay a fee. The paths that actually get you out.

• Reverse consolidation

  A new advance whose funder deposits weekly amounts to cover your existing MCA drafts while pulling its own smaller payment. It smooths the week, but the old advances keep drafting and total exposure grows: it is a new position on top of the stack, not a payoff. The arithmetic, shown in full.

• Forum selection clause

  A contract term naming the court where any dispute must be heard, in MCA agreements usually a New York county or another funder-friendly venue, regardless of where your business operates. Courts routinely honor them, which is why a business in one state can be sued in a court in another. What New York’s rules mean for your business.

The fine print

• Reconciliation clause

  A clause in most MCA contracts letting you request that payments be adjusted down to match actual revenue when sales fall. It exists because the deal is framed as a revenue purchase, and it is the most underused merchant right in the industry: each stacked contract’s clause applies independently. How to invoke yours, in writing.

• Personal guarantee

  Your personal promise, signed alongside the business, that makes you individually reachable if the contract is breached. Nearly all MCAs include one, and many are guarantees of performance triggered by contract breaches like blocking the ACH, not by mere business failure. Your real personal exposure.

• Confession of judgment (COJ)

  A document signed at closing that lets a creditor obtain a court judgment against you without a lawsuit, notice, or hearing. New York barred filing them against out-of-state debtors in 2019, but New York merchants remain exposed and some states still permit them. What signing one waived.

• Workout agreement

  The written document that records restructured terms between a business and a funder: the new cadence, the new amount, the new length, and what happens if a payment is missed. Nothing in a workout is real until it is on paper and signed by both sides. What restructuring can and cannot do.

When things go wrong

• Default

  The contract’s trigger state, defined far more broadly than missing payments: one bounced draft, a blocked ACH, or switching bank accounts can each qualify under many MCA agreements. Default unlocks the funder’s remedies: fees, acceleration, lien enforcement, and suit. The default timeline, stage by stage.

• Acceleration

  A contract right that makes the entire remaining balance due immediately upon default, usually with added default fees. It converts a payment problem into a full-balance crisis overnight, which is exactly what it is designed to do. What happens in the first week of default.

• UCC-1 financing statement

  A public filing, usually with the Secretary of State, that records a creditor’s lien claim on your business assets as collateral. MCA funders typically file one the day you sign, often covering all assets, not just receivables. It blocks clean financing and sales; it is not ownership or seizure. What the lien lets a funder do.

• UCC-3

  The follow-up filing that amends, assigns, or terminates a UCC-1. The termination statement is the one that matters to you: it is how a lien comes off the public record after a balance is resolved, and someone has to actually file it. Lien termination as a written term.

• UCC 9-406 notification

  A notice, named for Uniform Commercial Code section 9-406, that a funder claiming your receivables sends to people who owe your business money, telling them to pay the funder directly. It can reach your card processor, marketplaces, and customers, intercepting revenue at the source. What the letters mean and how to respond.

• Restraining notice

  A post-judgment demand served on your bank requiring it to hold the funds in your account, available in New York and many states. The bank must comply immediately, with no warning to you, which is why most owners discover the judgment and the freeze at the same moment. How freezes work and how they end.

• Levy

  The step past a freeze: a legal seizure that actually transfers money from your account to the judgment creditor. A restraining notice holds funds in place; a levy takes them. Owners conflate the two, and the difference decides what can still be done. Freeze, restraining notice, levy: the difference.

• Judgment

  A court’s formal decision that you owe the debt, whether won in a lawsuit, entered by your default in not answering, or historically through a confession of judgment. A judgment is what turns collection from letters into freezes, levies, and garnishment. What to do if an MCA company sues.

• Commercial debt

  An obligation that arises from a transaction for business purposes, such as a merchant cash advance or a business line of credit. The federal Fair Debt Collection Practices Act covers consumer debts, so most MCA collection falls outside it, though the FTC Act, state law, and court rules still apply. What still limits how a funder collects.

• Receivership

  A court-appointed outsider taking control of a business or its assets, sometimes sought by funders as leverage after default. It is rare relative to freezes and suits, but the threat appears in demand letters, and it is a matter for counsel the moment it is real. Where receivership fits in the cascade.

The ways out

• Debt resolution (also called debt settlement)

  The negotiated resolution of a balance for less than the full contract amount, documented in writing before money moves, as a lump sum or a scheduled payoff. The industry calls this debt settlement. Funders are not required to agree, and results vary. How renegotiated balances work here.

• Debt restructuring

  Renegotiating the terms of what you owe rather than the amount: extended schedules, one manageable payment in place of daily and weekly drafts, structures matched to real deposits. The balance largely stays; the shape changes so the business can breathe. When restructuring is the honest fit.

• Subchapter V bankruptcy

  A streamlined Chapter 11 track for small businesses, designed to be faster and cheaper than a full reorganization, with court protection that pauses most collection while a plan is confirmed. It requires a licensed attorney, and sometimes it is honestly the right answer. Bankruptcy and out-of-court resolution, compared.

• Payoff letter

  A creditor's written statement of the exact amount that will satisfy a debt on a given date, and what it will do once paid, such as filing a UCC-3 termination. Buyers and closing agents typically require one from every lienholder before a business sale closes. Selling or closing a business with MCA debt.

• Canceled debt income

  The part of a debt a creditor forgives, which the IRS generally treats as taxable income for the year of cancellation unless an exclusion such as bankruptcy or insolvency applies. How it applies to a reduced MCA balance is a question for a tax professional. The IRS rules, explained.