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Merchant Cash Advance Reconciliation Clauses and the “Look Back” Reality

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Merchant Cash Advance Reconciliation Clauses and the “Look Back” Reality


If your business is struggling to pay back a merchant cash advance due to a decrease or complete halt in business revenue or cash flow, then it is in your best interest to request a readjustment on your payment schedule from your lender.

Merchant cash advance contracts are full of clauses and junk fees that work to your lenders advantage, but there are certain clauses that work for you too. In order to not be considered an illegal loan, merchant cash advance companies must allow you to request a change in your payment plan based on your business’ revenue. In this article we will break down why this is the case and what you should do if you’re struggling with payments.

MCA Contracts Must Allow for Reconciliation to Avoid Being Considered a Usurious Loan

Merchant Cash Advance Companies provide working capital to small and midsize retailers and businesses, or merchants, through an alternative and specialized method of factoring receivables.

The merchant cash advance company purchases receivables anticipated to be generated from a merchant’s future sales. The merchant generally authorizes the merchant cash advance company to receive a certain percentage of its future daily receivables or a fixed daily amount, estimated to equal the percentage of repayment as contained in the Merchant Cash Advance Agreement.

Merchant Cash Advance contracts are most properly defined as the Purchase and Sale of Future Receivable Agreements. These MCA agreements will generally illustrate a total amount of future receivables purchased by the MCA company.

For example:

  • A mca company purchases $50,000 worth of future receivables from a merchant.
  • The lender funds the merchant borrower with $37,500 for those receivables.
  • The lender places a required repayment schedule at the repayment rate of $368 per day upon the borrower for the $37,000 advance.


  • This repay rate is theoretically calculated upon the contractually agreed percentage of the merchant’s daily or weekly receivables.

The contractual key to these transactions preventing them from being considered “loans” is that the merchant does not unconditionally agree to “repay” the advances.

The merchant is only selling its future receivables to the extent those receivables are generated by the business. If the merchant does not actually generate sufficient receivables due to adverse business conditions, the merchant cash advance company should, in theory, suffer the loss.

The merchant’s obligation to deliver the future receivables is expressly conditioned upon the continuance of the merchant’s business. Due to the conditional nature of the repayment obligation, a true merchant cash advance transaction is not considered a loan and therefore, is not subject to the commercial usury laws and state licensing laws that apply to loans.

Common law generally recognizes that for an advance to be characterized as a loan, the advance must be unconditionally repayable. If the obligation to repay is conditional, then the transaction is generally considered to not be a loan.

In other words, so long as the merchant cash advance transaction does not require the merchant to “repay absolutely”, the transaction is most likely not to be considered a loan.

MCA agreements contain that necessary “conditional repayment” designation to avoid being considered illegal loans. To do so, those contracts must contain something referred to as a Reconciliation or Re-Adjustment clause.

Reconciliation or Re-adjustment Clauses

A reconciliation, or re-adjustment clause, essentially states that if your daily or weekly revenues decline, then you have the right, or the MCA lender may even have the obligation, to adjust your daily or weekly payment downward to be more accurately tied to your current revenues based upon the daily or weekly repayment percentage as contained in that MCA contract.

If your revenue has gone down since the time you obtained the advance, once you notify your MCA lender of the decline in your receivables, the lender is contractually obligated to adjust your payment obligation downward.

The actual contractual language may state something like:

There is no interest rate, or payment schedule, or time period in which the purchased amount must be collected by Purchaser, (MCA company). Seller, (merchant) going bankrupt or going out of business, in and of itself, does not constitute a breach of this agreement. Purchaser is entering into this agreement, knowing the risk that seller’s business may slow down or fail.

These clauses are also sometimes referred to as “true-up” or “look back” clauses. These clauses extreme importance arises under the circumstances where the borrower (merchant) contacts his or her MCA company and tells the lender that their revenues have declined and requests a modification of the daily or weekly payments while the lender reviews the most current financial records of the merchant borrower to accurately formulate the new reduced payment schedule

When a merchant borrower contacts his or her MCA lender to explain that their revenues are down from the time they obtained the advance, the MCA lender will state that they will consider adjusting the payment to a lesser weekly or daily payment amount. But what most often occurs is the MCA lender does not actually request or review the current financial revenue information of the borrower to properly and accurately adjust the payment schedule, in accordance with the terms of the contract.

Another typical reconciliation or readjustment provision commonly found in Purchase and Sale of Future Receivables Agreements is as follows:

“if purchaser [MCA lender] determines that purchaser received an amount greater or less than the purchased percentage of seller’s future sale proceeds during the look back period, then purchaser may determine a remittance adjustment. Purchaser shall use reasonable business practices to determine the remittance adjustments so that purchaser is receiving the approximate purchase percentage of future sale proceeds.”

Because of this type of contractual language theoretically permitting the fluctuation or the changing of the payment based upon a change in revenue, courts have consistently held that Merchant Cash Advances are NOT usurious loans.

Contact Your MCA Lender to Request a Reconciliation

In the United States District Court, Southern District of New York, a judge expounded on his decision as to why the Purchase and Sale of Future Receivables contract between TVT Capital and Epazz, Inc. was not a loan.

In this case, the “receivables purchased amounts” were not payable absolutely. Payment depended upon a crucial contingency: the continued collection of receivables by Epazz from its customers.

TVT Capital was only entitled to recover 15% of Epazz’s daily receivables, and if Epazz’s sales declined or ceased, the receivables purchased amounts might never be paid in full. The Judge found that the reconciliation clause in his case was valid and therefore, the advance was not a loan.

However, of critical importance in this case, no allegation was brought by the merchant that TVT Capital ever denied Epazz’s request to reconcile the daily payments.

This is the Key.

If you are at risk of defaulting on your merchant cash advance and your revenues have declined since the time you obtained the advance, you must contact the lender in writing and request that they review your most current financials and adjust your daily or weekly payments to reflect the decline in your revenues. Failing to alert your lender of your revenue decline and failing to request a reconciliation, will greatly weaken your legal position.  

If the lender refuses to reduce your payment amount or refuses to even review your current financials to consider an adjustment of the daily or weekly payment to match the percentage of your receivables noted as the consideration in your MCA contract, then you’ve got a really strong case that your advance was not a conditional advance at all, but rather, an illegal, usurious and unenforceable loan.

Avoiding Usury Claims – MCA Companies Create the Appearance of Conditionality

In a Merchant Cash Advance transaction, payments to the lender are linked to, and contingent upon the merchant’s business revenue. In a loan, there is an unconditional right to repayment regardless of the state of the recipient’s business or financial affairs. 

To make certain the repayments are, or look, conditional, the MCA lenders must make certain that the merchant borrower does not unconditionally agree to “repay” the advances.   

Here are the terms of the loan agreement that courts acknowledge as evidence of a purchase and sale of receivables rather than a loan:

  • The merchant is only selling its future receivables to the extent they are available.  So, if cash receivables decline due to adverse business conditions (loss of site, natural disasters, pandemic, or similar material adverse change), the merchant cash advance company suffers the loss.
  • Bankruptcy is not considered a breach of contract or element of default.
  • The owner of the merchant business guarantees that the business will not breach any covenants in the merchant cash advance agreement, but the owner is not an unconditional guarantor of repayment.
  • The merchant’s obligation to deliver the future receivables is conditioned upon the continuance of the merchant’s business.

Request a Look Back or Reconciliation and Consult with an Attorney Before You Default

The coronavirus crisis is putting millions of small businesses in a precarious situation.  Before you default on your merchant cash agreement, making the current difficult situation for your business worse, move quickly to assemble your most current financial records, contact your MCA lender and request a “look back” or a reconciliation of your Purchase and Sale of Receivables Agreement.  

This may very well result in the accurate adjustment of your MCA payment amount or, if your efforts fail and the MCA lender will not accurately adjust your payment terms, then you have a very strong defense that your advance is in fact, an illegal and unenforceable loan. 

Our attorneys have extensive experience providing cash advance relief services to a wide variety of businesses nationwide.  When you consult us, we will take the time to review your merchant cash advance agreement, analyze your financial situation, and work with you to keep your business up and running, while also protecting your personal assets. 

Contact the Business Debt Law Group today for more information and a free consultation. 

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