Why Your MCA Contract Matters More Than You Think
An MCA contract — formally called a "Merchant Agreement" or "Future Receivables Purchase Agreement" — is a legally binding document that governs exactly how much you receive, how much you repay, how repayment is collected, and what happens if something goes wrong. Unlike standardized bank loan documents governed by extensive consumer lending regulations, MCA agreements vary significantly between providers and contain provisions that can have serious consequences if you do not understand them.
Below are the seven terms you need to understand before signing.
1. Purchase Price and Advance Amount
The "purchase price" is the total amount you owe — your advance amount multiplied by the factor rate. The "advance amount" is what actually hits your bank account. Make sure these numbers match what was discussed during the sales process. If you were quoted a $50,000 advance at a 1.3 factor rate, the purchase price should be $65,000. Watch for origination fees that reduce your net funding — a $50,000 advance with a 3% origination fee means you receive $48,500 but owe repayment on the full $50,000.
2. Holdback Rate and Remittance Method
The holdback rate (also called "retrieval rate" or "specified percentage") determines what percentage of your daily revenue goes to the provider. Typical holdback rates range from 10 to 20%. The contract should clearly state whether repayment uses split withholding (percentage of card sales), fixed ACH (set daily amount), or lockbox (bridge account). If the contract specifies fixed ACH, understand that your payment does not adjust when sales slow down — this creates risk during slow periods.
3. UCC-1 Filing (Blanket Lien)
Nearly every MCA provider files a UCC-1 Financing Statement with your state's Secretary of State, creating a public record of their security interest in your business assets. Most MCA liens are "blanket liens" covering all business assets — inventory, equipment, accounts receivable, and general intangibles. This filing is effective for 5 years.
The practical impact: other lenders checking your business will see this lien and may decline to extend credit. If you later apply for an SBA loan or bank line of credit, the UCC filing from your MCA can complicate or prevent approval. After you fully repay an MCA, you have the right under UCC Section 9-513 to demand that the provider file a termination statement within 20 days. For more on how these filings affect your cost of capital, see our guide to MCA costs and factor rates.
4. Personal Guarantee
Most MCA agreements include a personal guarantee making you individually liable for the full obligation. "Unlimited" personal guarantees — the most common type — expose your personal assets: home equity (subject to state homestead exemptions), savings accounts, vehicles, and investments. Some agreements extend the guarantee to spouses or business partners who sign. Read the guarantee section carefully and understand that you are putting your personal finances on the line.
5. Confession of Judgment
A confession of judgment (COJ) is a pre-signed legal document that allows the MCA provider to obtain a court judgment against you without a trial, without notice, and without giving you the opportunity to present a defense. Before recent reforms, this was one of the most abused provisions in MCA contracts.
New York banned out-of-state COJ filings in August 2019 following a Bloomberg investigation that revealed thousands of cases of abuse. New Jersey banned them in financing agreements in 2020. California banned them effective January 2023. Several other states have followed with restrictions. If your contract contains a COJ clause and you operate in a state that has banned or restricted them, the clause may be unenforceable — but you should not sign without understanding the risk. See our guide on MCA regulations by state for the latest on disclosure laws and borrower protections.
6. Default Triggers and Remedies
MCA contracts define "Events of Default" broadly. Common triggers include missing a single ACH payment, changing your bank account without notifying the provider, processing credit cards through a different processor, taking additional financing without consent, experiencing a material adverse change in your business, or failing to maintain a minimum bank balance. Cross-default provisions mean defaulting on one MCA triggers automatic default on all others.
The remedies available to the provider upon default are extensive: acceleration of the full remaining balance, freezing of bank accounts, enforcement of UCC liens, litigation under the personal guarantee, and in states that allow it, filing of the confession of judgment.
7. Reconciliation Rights
Reconciliation is the right to request that your payment amount be adjusted downward when your revenue declines. This provision is legally critical — in the landmark Yellowstone Capital litigation, New York courts held that an MCA without a genuine reconciliation provision may be reclassified as an illegal usurious loan.
Check whether your contract includes a reconciliation clause, what triggers you can invoke it (typically a documented decline in revenue), what the process is for requesting it, and what the provider's timeline for responding is. In practice, some providers make reconciliation requests difficult or apply very narrow definitions. But having the right in your contract gives you legal leverage if payments become unmanageable.
Before signing any MCA agreement, take 24 hours to review it carefully. If anything is unclear, ask questions. At iAdvance Now, we review contract terms with you and help ensure you understand every provision before you commit. Call us at 866-448-7628.