8 Common Mistakes in Merchant Cash Advance Contracts: Avoiding Pitfalls

By: Claudia Stefano
October 11, 2023 2:12 am

: 8 Minutes to Read

8 Common Mistakes in Merchant Cash Advance Contracts: Avoiding Pitfalls

8 Common Mistakes in Merchant Cash Advance Contracts: Avoiding Pitfalls

Did You Know?

MCAs are not loans; they’re technically a sale of future receivables. This distinction means they’re not subject to the same regulatory oversight as traditional lenders, potentially exposing businesses to predatory practices.

Entering a Merchant Cash Advance (MCA) contract can be a fast and flexible financing solution for small businesses needing immediate cash flow. However, the devil is often in the details. Business owners should know common pitfalls that can lead to financial difficulties, misunderstandings, and potential legal issues.

A Merchant Cash Advance is an agreement between a business owner and a lender, where the lender provides a cash advance in exchange for a percentage of the business’s future sales. As attractive as this financing option may seem, business owners need to investigate the terms of the contract thoroughly, the costs associated with the advance, and the legitimacy of the MCA provider before signing on the dotted line.

Key Takeaways

  • Be aware of the potential costs and risks of a Merchant Cash Advance.
  • Always read the fine print and pay attention to clauses like personal guarantees. All
  • Compare multiple offers and consider other financing options before committing to an MCA contract.

Not Understanding the Costs

When entering into a merchant cash advance (MCA) contract, one of the common mistakes business owners make is needing to understand the costs associated with the advance fully. This could lead to unexpected expenses, making it more difficult for businesses to manage their cash flow.

The costs of an MCA can include the principal amount, interest rate, factor rate, and sometimes additional fees. It is essential for businesses to fully comprehend these costs and how they affect the total repayment of the advance.

Interest rates are often perceived as the primary cost, but with an MCA, the factor rate is a distinct factor to consider. The factor rate is a multiplier applied to the principal amount to determine the total repayment. For example, a $10,000 advance with a factor rate of 1.3 means a repayment of $13,000. Unlike traditional loans that use an annual percentage rate (APR), the MCA factor rate does not account for the time it takes to repay the advance, making it difficult to compare with other financing options.

Businesses must also be aware of the total cost of the advance, expressed as the annual percentage rate (APR). This rate calculates the yearly percentage costs of the advance, including the interest rate and additional fees. While an MCA might have a lower factor rate, its actual cost can be much higher when expressed as an APR, especially if the advance is repaid quickly. Understanding the APR in an MCA contract helps businesses compare different financing options more effectively.

It’s also crucial for businesses to consider any additional fees that might be added to the MCA. These fees can include origination, processing, or late payment fees, which may add up quickly and increase the overall cost of the advance.

In conclusion, taking the time to fully understand the costs, including factor rate, APR, and additional fees, is vital when entering a merchant cash advance contract. By doing so, businesses can make informed decisions and avoid misunderstandings that could negatively impact their financial stability.

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Failing to Read the Fine Print

One common mistake when entering into a Merchant Cash Advance (MCA) contract is needing to read the fine print thoroughly. The fine print often hides significant fees, terms, and conditions. By overlooking these details, business owners may face unexpected legal issues and financial consequences.

Businesses need to seek the help of an attorney to understand the terms and conditions before signing any agreement. Legal professionals can help combat potential liability and navigate contractual obligations. Failing to do so may result in business owners unknowingly consenting to a confession of judgment. This could enable the MCA provider to bypass the standard legal process and directly obtain a judgment against the business if there is a dispute.

Another possible issue concerning liability and legal issues is including a personal guarantee in the contract. It may stipulate that the business owner is liable for the entire debt if it fails to make the necessary repayments. A thorough review of these clauses with an attorney can help determine potential risks and prevent unwanted liability.

Regarding repayment terms, businesses should pay close attention to how the MCA agreement defines their future receivables. This is crucial because it can significantly impact the business’s cash flow and income. Understanding the calculation and allocation of future receivables can aid businesses in making informed decisions.

Moreover, the merchant may encounter problems when faced with lawsuits due to neglecting the legal section of the contract. MCA providers may exercise the right to file a lawsuit if the business defaults on contract terms. To avoid this, businesses must be familiar with the MCA’s legal provisions and take necessary precautions.

Lastly, examining the reconciliation provisions in the contract ensures that businesses are aware of the steps required to reconcile any discrepancies between the advanced amount and the actual revenue collected. Businesses can navigate disputes and better manage their MCA contract by adequately understanding the reconciliation procedure.

In summary, carefully reading the MCA agreement in consultation with an attorney can help businesses avoid potential legal and financial issues, ensuring a more successful relationship with their MCA provider.

Overlooking the Daily Withdrawal Impact

One common mistake when entering into a merchant cash advance (MCA) contract is overlooking the potential impact of daily withdrawals on business operations. The MCA lender typically takes a portion of the borrower’s credit card sales or a fixed amount from the borrower’s bank account through an automated clearing house (ACH) transfer.

The daily withdrawals can lead to cash flow shortages for the business. As MCA lenders primarily base their advances on the borrowers’ existing credit card sales, they may need to fully consider the effect of daily withdrawals on ongoing business operations. This oversight can put a significant financial strain on businesses, especially those with seasonal or unpredictable sales patterns.

Using a professional tone, it is essential for business owners to thoroughly assess the potential impact of daily withdrawals on their cash flow before entering into an MCA contract. They should also carefully review the MCA agreement for any reconciliation or re-adjustment clauses that may allow the lender to adjust the repayment amount based on changes in revenue.

Taking proactive measures to accurately project business cash flow needs and weigh them against the terms of the MCA can help minimize the risk of financial challenges. Businesses can make better-informed decisions when entering into a merchant cash advance contract by considering the potential effects of daily withdrawals on credit card sales, business cash flow management, and overall operations.

Not Comparing Multiple Offers

When entering into a merchant cash advance contract, one common mistake business owners make is not comparing multiple offers. This can lead to unfavorable terms and missed opportunities for better deals. Comparing offers from different providers allows businesses to evaluate factors such as interest rates, repayment periods, and how these elements may impact their credit score.

Interest rates are a critical aspect to consider when evaluating merchant cash advance offers. A lower interest rate can significantly reduce the total repayment amount. Failure to compare the interest rates of different providers may result in accepting a higher rate, leading to increased costs for the business. Understanding the factor rate in a merchant cash advance and how it relates to the total repayment amount is essential.

Another factor to consider is the repayment period. A shorter repayment period results in higher daily or weekly repayment amounts, which could strain a business’s cash flow. On the other hand, a more extended repayment period gives the business more time to repay the advance, resulting in lower daily or weekly payments. Comparing multiple offers can help businesses identify a repayment period that best fits their financial situation and cash flow.

Credit scores should also be taken into account when comparing offers. Some merchant cash advance providers may require a specific credit score, while others may be more lenient or not consider the score. Determining if a particular offer’s credit score requirement aligns with the business’s credit profile is essential. A good credit score can also allow a business to negotiate better terms, such as lower interest rates or extended repayment periods.

Comparing multiple merchant cash advance offers can help business owners make informed decisions, considering interest rates, repayment periods, and credit score requirements. This process enables them to secure the most favorable terms, benefiting their financial situation.

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Ignoring the Personal Guarantee Clause

One common mistake business owners make when entering into a merchant cash advance (MCA) contract is paying attention to the personal guarantee clause. A personal guarantee is a contract wherein an individual agrees to pay a business debt, committing to using their assets if the business fails to repay the loan ^. By overlooking this clause, business owners may inadvertently put their assets at risk.

Merchant cash advance companies often require personal guarantees from business owners to secure their advances. In exchange for offering flexible payment terms and bypassing strict credit requirements, MCA companies may request a debt guarantee to reduce risk. These guarantees can have severe consequences for business owners if their revenue declines, making it challenging to repay the MCA.

Additionally, merchant cash advances are not subject to the same usury laws as traditional loans due to the nature of merchant cash advances. Usury laws govern the maximum interest rates that can be charged on a loan. Still, merchant cash advances are structured as a purchase of future receivables, which may come with higher costs than a traditional loan.

When a personal guarantee has been signed, and the MCA company pursues a settlement, the debtor may be held personally liable for the repayment of the advance. If the business cannot repay the loan, the business owner’s assets could be at stake.

In summary, business owners need to understand the implications of a personal guarantee clause in a merchant cash advance contract. Neglecting this clause may have serious financial consequences affecting the business and the individual signing the guarantee. To reduce the risk, business owners should carefully review all components of the MCA contract and seek professional advice if necessary.

Taking on More Advance than Needed

One common mistake businesses make when entering into a merchant cash advance (MCA) contract is taking on more advance than they need. While receiving a more considerable amount of capital might seem attractive initially, it can lead to higher repayment amounts and longer payback periods, putting unnecessary strain on the business’s cash flow.

When considering an MCA, it’s essential to assess the business’s financial requirements carefully and only request the advance amount needed. Doing so will make it easier to manage the payback amount and avoid potential financial difficulties. Many MCA providers have flexible credit requirements, enabling businesses with less-than-perfect credit scores to access funds. However, this leniency should not be an excuse to overborrow.

Additionally, it’s crucial to understand that the advance amount will be deducted from the business’s daily or weekly sales, which may involve working with a specific credit card processor. This can affect the business’s overall cash flow and potentially harm its financial stability if the advance amount is too high. To avoid this scenario, businesses should closely monitor their sales performance and repayment terms to ensure they can easily manage the payback amount.

In summary, to avoid the common pitfall of taking on a larger MCA than needed, businesses should carefully evaluate their financial needs, be mindful of repayment terms, and keep track of their sales performance. By doing so, they can maintain a healthy cash flow while utilizing the benefits of merchant cash advances responsibly and sustainably.

Not Considering Other Financing Options

Small business owners must explore various financing options before purchasing a merchant cash advance (MCA). An MCA might only sometimes be the best choice, as they often come with high fees and can lead to financial trouble for a business.

One common mistake made by business owners is failing to take the time to research other financing options, such as lines of credit or traditional loans. Lines of credit, for instance, can provide more flexibility and lower interest rates compared to merchant cash advances, making them a more cost-effective option for many small businesses.

In addition to traditional loans, various alternative financing solutions are available for small businesses. Evaluating and comparing these different financing options can lead to better financial results and help avoid any potential financial struggles that may arise from accepting a merchant cash advance without fully understanding its implications.

It is also important for businesses to have a clear understanding of their current financial health and future growth projections. This information can be crucial in helping business owners determine the most suitable financing option for their needs. By carefully assessing these factors, businesses can make more informed decisions when entering financial agreements.

In conclusion, small business owners should consider various financing options before opting for a merchant cash advance. By doing thorough research and comparing different financial solutions, businesses can make better decisions and avoid the pitfalls commonly associated with merchant cash advance contracts.

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Neglecting to Assess the Legitimacy of the MCA Provider

When entering a Merchant Cash Advance (MCA) contract, small business owners must correctly assess the MCA provider’s legitimacy. This can lead to unfavorable terms, difficulties in the repayment process, and even potential litigation.

Before signing an MCA contract, conducting thorough research on the MCA provider is essential. Look for information on their business practices and any governmental restrictions they may have, and if possible, consult with a lawyer familiar with the MCA industry. Ensuring that the provider has a solid reputation and adheres to regulations set by the Federal Trade Commission (FTC) can help mitigate risks and provide peace of mind for the business owner.

As part of the MCA application process, business owners should scrutinize the terms and conditions of the contract. This includes examining the purchase price, amount, repayment schedule, and any collateral the provider requires. Unsecured MCA contracts may seem attractive but often have higher fees and a more aggressive repayment schedule. It’s crucial to assess the impact of these terms on the small business’s cash flow and consult with a financial professional if needed.

It is also important to understand the difference between public companies and merchant cash advance funders, as the latter may need more transparency and regulatory oversight found with public companies. Be cautious of providers who make exaggerated claims about their ability to support your business, and be prepared to make informed decisions about the potential risks and benefits.

If business owners default on their MCA contract, they may face financial litigation, resulting in lengthy and costly battles in federal and state courts. Unlawful business practices, such as hiding fees within the contract or having unclear repayment terms, can lead to disputes that would have been avoidable with proper research and due diligence. Small business owners should proactively understand their MCA contract and their provider’s reputation to protect themselves from such scenarios.

Overall, small business owners must carefully assess the legitimacy of MCA providers to make well-informed decisions and avoid potentially damaging contracts. By researching and seeking professional advice, business owners can ensure they enter into MCA contracts that work best for their needs, thus reducing the risk of complications or disputes in the future.


In conclusion, businesses must know common mistakes when entering a merchant cash advance (MCA) contract. Ignorance or negligence can result in serious financial consequences and possible legal issues.

One potential concern related to MCAs is their connection to usury statutes. Business owners should understand the implications of high-interest rates and triple-digit annual borrowing costs and be aware of potential violations of state or federal regulations. A thorough financing agreement examination can help identify hidden fees or early repayment penalties.

Another potential risk in MCAs is including a Confession of Judgment (COJ) clause. This enables MCA providers to take legal action and obtain judgments without providing notice to the borrower. Due diligence and consulting with legal professionals can help mitigate the risks associated with COJs.

Deceptive advertising and questionable debt collection practices are other areas of concern in the MCA industry. Retail businesses should scrutinize marketing materials and assess the credibility of MCA providers to avoid potential misinformation. Familiarizing oneself with federal oversight and regulations can also provide additional protection.

Lawsuits and legal disputes involving MCAs may require temporary restraining orders and other legal interventions. Awareness of state and federal regulations, including the criminal usury statute, will aid in adequately evaluating and negotiating an MCA contract.

In summary, businesses must educate themselves about the various aspects of merchant cash advances and be diligent when entering into contracts. By understanding potential pitfalls and exercising caution, it is possible to navigate the MCA landscape while minimizing unnecessary risks.

Further Reading/Resources

For those interested in learning more about common mistakes when entering into a merchant cash advance (MCA) contract, several resources are available to provide insights and guidance. These resources are especially beneficial to small businesses considering such financial agreements to meet their cash flow needs.

For a comprehensive understanding of MCAs, the Small Business Owner Guide for Choosing the Best Loan article by Regroup Partners gives insight into when it comes time to choose a loan.

This resource presents various perspectives on merchant cash advances and the potential challenges involved. By reviewing this source, small businesses can make more informed decisions when considering MCAs as a financing option.

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Frequently Asked Questions

What are the hidden fees in a merchant cash advance contract?

In a merchant cash advance (MCA) contract, hidden fees include application, origination, or administration fees. It’s essential to carefully review the contract to identify all fees associated with the advance. Be aware of any costs beyond the factor rate, which is the primary cost of an MCA.

How do you identify unfavorable repayment terms and conditions?

When reviewing an MCA contract, look for unfavorable repayment terms such as high factor rates, overly aggressive remittance schedules, or inflexible payment terms. To avoid getting trapped in a contract with unfavorable terms, carefully analyze the repayment schedule, factor rate, and potential impact on your business’s cash flow.

What impact does an MCA contract have on the business’s cash flow?

An MCA contract can significantly impact a business’s cash flow, mainly if daily automatic deductions from credit card sales are required. This can make managing cash flow more challenging, as a portion of the daily revenue is used to repay the advance. Ensure the repayment terms align with your business’s cash flow capabilities to avoid financial strain.

Can a high factor rate negatively affect your business?

Yes, a high factor rate can negatively affect your business. A factor rate is a fixed cost of the MCA, and higher rates can result in a higher repayment amount. This can strain your business’s financial health, especially if the advance could be more effective in generating revenue. Compare different MCA offers and assess each factor rate’s impact on your business before entering a contract.

What to consider when assessing prepayment penalties?

Assessing prepayment penalties is crucial when considering an MCA contract. Some contracts may include penalties for repaying the advance early, which can be costly if your business generates enough revenue to pay off the advance ahead of schedule. Ensure you understand the repayment terms and any associated penalties to avoid unexpected charges.

How can I avoid multiple advances while in an MCA contract?

Avoiding multiple advances while in an MCA contract can be achieved by carefully managing your business’s finances and planning for future expenses. Before entering into an MCA contract, ensure your business has a sufficient revenue stream to meet the repayment terms. If additional funding is required while in an MCA contract, consider alternative financing options such as loans or lines of credit that can be managed alongside the existing advance.

Claudia Stefano

Claudia Stefano is a seasoned finance professional and the esteemed President of Regroup Partners, a company she founded with the vision of assisting business owners who are suffering from debt and helping get their businesses back on financial track. With a career that spans over three decades, Claudia has established herself as a leader in the finance industry, known for her strategic acumen and commitment to excellence.

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