How to read an MCA contract

A merchant cash advance is legally a purchase of your future revenue, not a loan. That distinction is why it is priced differently, is exempt from many lending rules, and can carry costs that would be illegal as stated interest. Reading the contract starts with accepting that the language is built around a sale of receivables.

Instead of an interest rate, an MCA uses a factor rate, usually written as a decimal between about 1.1 and 1.5. You multiply the amount advanced by the factor to get the total you owe. Advance $50,000 at a 1.4 factor and you repay $70,000, so the cost of the money is $20,000 regardless of how fast you pay it back.

That is the trap in the number. A 1.4 factor sounds smaller than 40 percent, but because the money is repaid over months rather than a year, the effective annual cost, the true APR, is usually far higher than the factor implies, often well into the triple digits. Unlike interest, the factor does not shrink if you pay early, unless the contract specifically offers a prepayment discount.

To sanity-check the cost, take the total fee (the advance times the factor, minus the advance), divide by the advance to get the cost rate, then annualize it over the expected repayment period. A $20,000 fee on a $50,000 advance repaid in six months is not a 40 percent rate; annualized it is roughly 80 percent or more once you account for the compressed schedule and the daily payments.

A growing number of states, including California, New York, Utah, and Virginia, now require commercial financing disclosures that put an estimated APR on the document. If your contract has one, read it. If it does not, do the math yourself before signing.

Payment mechanics: how much is pulled, how often (daily or weekly), and whether it is a fixed ACH or a percentage of sales, called the holdback.

Reconciliation: whether you can adjust payments down if revenue drops. A real reconciliation clause is protection; a vague or discretionary one is not.

Prepayment: whether paying off early saves you anything. Many MCAs offer no discount at all.

Personal guarantee and confession of judgment: a personal guarantee puts your personal assets on the line, and a confession of judgment lets the funder win a judgment without a court fight. Confessions of judgment against out-of-state small businesses were restricted after widespread abuse, but they still appear, so look for them.

Stacking and UCC: most MCAs file a UCC lien on your receivables and prohibit taking a second advance. Stacking advances is where cash-flow death spirals usually begin.

Add up the total dollar cost, not the factor. Confirm the daily or weekly payment against your real revenue, not a good month. Ask, in writing, about prepayment savings and reconciliation. If a broker will not answer those plainly, that is the answer. If you are already stacked, mapping every advance and its true cost is the first step to a way out.