Industry
Part of Merchant Cash Advances: How the Contract Works
Vetting the broker and funder behind merchant cash advances
Merchant cash advances usually arrive through a broker. Questions to ask on the first call, who to check the names with, and what to get in writing.
Most offers reach a business through a person, not a funder. That person's pay, promises and silences shape what you end up signing, so vet them before you look at a factor rate. Ask the questions below on the first call, then check the answers against public sources.
No funder or broker is named here. This is a method for judging whoever is on the other end. It neither recommends the product nor condemns it. Speed and light documentation have a value; the task is to know what you are paying for them and who you are paying.
What to take away
- The person offering the advance is often not the funder. Ask for the funder's legal name first.
- Ask how the intermediary is paid, and whether the fee is deducted from your advance.
- Check the names with a state regulator, the attorney general and NMLS Consumer Access.
- Get the key terms in writing, and have a lawyer read the agreement before you sign.
Start with whose name is on the agreement
Ask for the legal name of the entity named on the agreement and on any filing. Advances are widely sold through brokers and intermediaries, who may submit your file to several funders at once, so the name you hear first may not be the funder.
Write the name down exactly as given and use it for every later check. A person who will not name the funder before you sign anything has handed you the first concerning sign. Slow down until the name arrives, and treat a vague answer as an answer.
Six questions for the first call
Put these to the broker or the funder's representative in this order. Write the answers down, because the contract should match them. An answer you cannot get in writing is worth a pause.
- Who is the funder named on the agreement, and on any filing against my business?
- How are you paid, and is your fee deducted from my advance?
- Which funders will you submit my file to?
- Is repayment a percentage of card settlements or a fixed daily debit from my bank account?
- If the debit is an estimate of a percentage of sales, can I ask for an adjustment when sales fall, and how long do you have to respond?
- Is there any discount for early repayment, and what triggers it?
Questions four to six look like contract detail, but they decide what a bad month does to you. Under a holdback the dollar amount moves with your sales. Under a fixed debit it does not, whatever you took in.
What shopping your file can cost
A file shopped to multiple funders can produce multiple enquiries against your business and repeated offers for months afterwards. Ask which funders will see your documents before you send them, and ask for the answer in an email.
The intermediary's fee matters for a second reason. If it is deducted from your advance, the net amount that lands is smaller than the headline figure, and every later comparison should use the smaller number.
An intermediary who tells you who funds, how they are paid and which funders hold your file is doing a job. One who will not answer is a reason to slow down.
Checking the names against public records
Each name you collected can be checked somewhere. Terms belong to the contract and change between funders, but who regulates the arrangement, who is licensed and what is filed against you are matters of record.
| Check | Where | What it tells you |
|---|---|---|
| State regulator | State banking department or department of financial institutions, through the Conference of State Bank Supervisors regulator directory at csbs.org | Who regulates the arrangement where you are |
| Attorney general | The state attorney general's consumer protection division | Where to raise a question about the funder or broker |
| Licence claim | NMLS Consumer Access at nmlsconsumeraccess.org | What the funder or broker holds in your state |
| Lien filings | The state filing office for secured transactions | Whether a lien already sits over your business assets |
| Reference | A customer the funder names | Whether reconciliation ever actually happened |
Whether the arrangement is a sale or a loan, and who regulates it, varies by state. If the funder or the broker claims a license, NMLS Consumer Access shows what they hold in your state. A claim you cannot confirm there is a fact worth knowing before you share bank statements.
A filing against business assets is an ordinary secured transaction, visible to anyone who searches. It sits in the way of other borrowing for as long as it stands, so ask when and how a lien is released.
What to have in writing before you sign
Turn the first-call answers into a short list the funder must put on paper. Tick each item only when the document says it, not when someone says it.
- The funder's legal name, matching the name on any filing
- Whether collection is a percentage of card settlements or a fixed daily debit
- A reconciliation right, not a discretion, with a response deadline
- The full list of default triggers, such as changing card processors
- Any blanket lien and any guarantee, with what converts it to full personal liability
- Whether a confession of judgment or a lockbox arrangement is present
- Any early repayment discount and how it is calculated
Guarantees deserve a second read. So-called performance or validity guarantees may look narrow and convert to full personal liability on specified acts, such as changing processors or closing the account.
A confession of judgment, where permitted, can allow a judgment against you without a hearing. The FTC alleged in one suit that the defendants required businesses and their owners to sign confessions of judgment. That let the defendants go immediately to court and obtain an uncontested judgment in case of an alleged default.
That is an allegation in one case, not a description of every funder.
The state where a judgment would be entered controls. Its presence in a draft is a reason to have a lawyer read the agreement before you sign, not after. A direct processor or lockbox arrangement also puts the funder between you and your card receipts, so ask how it ends if you refinance.
Signals worth weighing
What you hear on the call and see in the draft adds up to a picture of the counterparty. Sort it into two lists and see which is longer.
Reassuring signs
- The person you deal with names the funder before you sign anything.
- The contract states a reconciliation right, not a discretion, and gives a response deadline.
- The funder agrees in writing that the daily debit is an estimate that can be adjusted.
- Any lien, any guarantee, and any filing are described to you before you sign.
Concerning signs
- The person you deal with will not name the funder.
- A confession of judgment, or a lockbox you cannot unwind without the funder's consent.
- Default triggers that catch ordinary acts, such as changing your card processor.
- A reconciliation clause no customer can describe ever using.
Neither list is proof. Both are worth noticing.
Reassuring versus concerning signals
Reassuring
- Agreement
- Full agreement before signature
- Identity
- Plain answers on funder
- Reconciliation
- Defined process and reference
- Fees
- Stated in one place
- Time
- Days to have it read
- Paperwork
- No surprise clauses
Concerning
- Agreement
- Pressure to sign a summary
- Identity
- Vagueness on funder or fee
- Reconciliation
- Clause treated as formality
- Fees
- Net amount not in writing
- Time
- Same-day deadline
- Paperwork
- Confession of judgment as routine
Price comes after the people and the paper
Once the names check out and the terms are on paper, turn the offer into a figure you can set beside a loan. Find the net amount after fees, the total you will deliver, the difference, and the term implied by the daily amount against your real sales.
Pricing an advance like a loan
- Find net amount after fees
- Find total you will deliver
- Take the difference
- Derive term from daily amount
- Annualize using daily cash flows
- Compare with cheapest product
Then annualize properly, using the daily cash flows rather than the naive division, because you never hold the whole advance for the whole term. The arithmetic, worked on invented figures, is in the merchant cash advances calculator. The contract mechanics sit in merchant cash advances.
Compare that figure with the cheapest product you could obtain, costed the same way. Many advances are taken by businesses that had a cheaper option and never priced it, because the advance came first.
If there is no early repayment discount, there is no reward for speed at all, and the annualized cost only rises as the term shortens. Term loans comparison shows how to set such offers side by side. For a seasonal gap, the honest comparison is usually a line of credit.
Common questions
Is a broker a problem?
Not in itself. An intermediary who tells you who funds, how they are paid, and which funders they have submitted your file to is doing a job. One who will not answer those questions is a reason to slow down.
How do I check a funder's licence?
If the funder or the broker claims a license, NMLS Consumer Access shows what they hold in your state. The state banking department and the attorney general's consumer protection division are the other places to ask.
What single clause should a lawyer read?
Any confession of judgment, if one is present. After that, the guarantee and its conversion triggers.
Does vetting the funder mean I should not take an advance?
No. It means knowing who you are paying and what the document lets them do, so that if you do take one it is because you priced the speed and chose to pay for it.
