As a Funder: Essential Provisions Your MCA Contract Must Include

Merchant cash advance (MCA) agreements face increasing scrutiny, and even minor drafting flaws can trigger costly litigation. As a funder, making sure your contracts are airtight not only protects your investment but also demonstrates professionalism and transparency to merchants and the courts. In determining whether a transaction is a loan or a true merchant cash advance, courts in New York commonly apply a three-part test: whether the agreement includes a reconciliation provision, whether repayment has an indefinite term, and whether the funder lacks recourse if the merchant files for bankruptcy. Defense attorneys often argue these deals are loans to support usury claims, so addressing these factors explicitly in your contracts is essential.

Below are the three essential provisions every MCA contract must include, plus an additional recommendation that consistently prevents downstream disputes. Every MCA contract must have the three provisions, and the fourth is a highly recommended addition.

1. A Strong and Courteous Reconciliation Provision

Your reconciliation clause should not be discretionary. If a merchant requests reconciliation, your agreement must require the funder to perform it without exceptions. This protects your contract against arguments that the MCA agreement was a disguised loan. As funders understand, you are purchasing receivables, not enforcing fixed payments regardless of revenue.

2. Acknowledgment of No Definite Time Period

Your contract should specify that there is no fixed term for repayment. We recommend avoiding even an estimated repayment period. Due to the merchant’s reconciliation rights, payments may be delayed or, in some cases, may never fully materialize depending on receivables. By including this language, you show that you accept the inherent risk of purchasing receivables and are not guaranteed repayment on a schedule.

3. Explicit Clarification That Bankruptcy Is Not an Event of Default

Bankruptcy may not trigger an automatic default requiring repayment of the entire purchased amount. Making this crystal clear helps differentiate your MCA agreement from a traditional loan, which is critical for enforceability. State plainly that the transaction is a purchase of future receivables, not a loan, and that a bankruptcy filing alone does not constitute default. Clarify that while bankruptcy alone does not trigger default, other Events of Default – such as fraud or misrepresentation – remain fully enforceable.

4. Clear, Specific Attorney’s Fees Provision

Avoid vague phrases like “reasonable attorney’s fees.” While acceptable, they open the door for courts to use the lodestar method, multiplying hours worked by an hourly rate and potentially reducing your recovery. In New York and several other jurisdictions, percentage-based attorney’s fees provisions like the following have been upheld. Always confirm compliance with your governing law before adopting specific percentages:

“Upon the occurrence of an Event of Default, and Buyer retains an attorney or law firm to enforce this Agreement, Merchant and Guarantor agree that a fee equal to 30% of the Remaining Balance (purchased amount less amount remitted by Merchant) (“Attorney’s Fees”) shall be immediately assessed, and Merchant and Guarantor agree that this calculation for Attorney’s Fees is reasonable.”

Final Thoughts

Tightening your MCA contracts with these provisions will prevent expensive disputes and ensure your agreements stand up to judicial scrutiny. Clear, unambiguous terms protect you. Periodic reviews of your contracts by knowledgeable counsel are also a smart investment. Regularly consulting counsel familiar with evolving MCA case law ensures your agreements remain enforceable and defensible in court. Small details today can prevent major headaches tomorrow.