McDONNELL HOPKINS - MCA News Desk Author: Paddy "The Pill" McDonnell

Merchant Cash Advances (MCAs) are often marketed as fast, convenient financing for small businesses, but they come with risks that aren’t always obvious in the fine print. Before you sign on the dotted line, it’s crucial to understand the common red flags in MCA contracts so you don’t inadvertently agree to terms that could seriously hurt your cash flow, put your assets at risk, or create unintended legal exposure.

1. Lack of Transparency in Costs and Fees

One of the biggest warning signs in any MCA contract is when the true cost of financing isn’t clearly stated. MCA providers typically use factor rates instead of interest rates, which can obscure the real cost of capital if not properly disclosed.

What to watch for:

• No clear disclosure of the total repayment amount

• Vague or undefined fees labeled as “processing,” “administrative,” or “default” charges

• No explanation of how daily or weekly remittances are calculated

If you cannot easily determine how much you will repay in total, that lack of clarity is a significant red flag.

2. Excessive Factor Rates and Disguised Interest

Although MCAs are structured as purchases of future receivables, many contracts function economically like high-interest loans. When a factor rate is converted into an effective annualized rate, the true cost can be extraordinarily high.

Red flags include:

• Factor rates that result in triple-digit APR equivalents

• Guaranteed repayment amounts regardless of business performance

• Language that eliminates reconciliation or adjustment tied to actual revenue

Contracts that guarantee repayment regardless of sales may be vulnerable to being recharacterized as loans under usury law.

3. Confession of Judgment and Extreme Enforcement Rights

Some MCA agreements contain provisions allowing the funder to obtain a judgment without a trial if a default is alleged. These provisions dramatically shift leverage away from the merchant.

Why this matters:

• Merchants may lose the opportunity to present defenses

• Judgments can be entered rapidly, sometimes in out-of-state courts

• Bank accounts and assets may be restrained with little notice

These clauses deserve close scrutiny and may raise enforceability concerns depending on jurisdiction.

4. Inflexible Repayment Terms

A legitimate MCA should fluctuate with a merchant’s actual revenue. Contracts that impose fixed daily or weekly payments without meaningful reconciliation can signal loan-like behavior.

Warning signs include:

• No mechanism to reduce payments during slow periods

• Daily ACH withdrawals unrelated to actual sales volume

• Default triggered by short-term cash flow disruptions

Rigid repayment structures can quickly destabilize a business, particularly in seasonal or cyclical industries.

5. High-Pressure Sales Tactics

Aggressive sales tactics are often used to rush merchants into signing agreements before they fully understand the risks.

Be cautious if you encounter:

• “Sign today or lose the offer” language

• Refusal to provide complete contract documents in advance

• Evasive answers to direct questions about costs and defaults

Reputable funders allow time for review and encourage independent evaluation.

6. Personal Guarantees and Hidden Personal Liability

Many MCA contracts include personal guarantees that extend liability beyond the business entity.

Key red flags:

• Personal liability triggered by ordinary business hardship

• Vague “bad acts” clauses that expand personal exposure

• Cross-collateralization of unrelated assets

Merchants should fully understand when and how personal liability may attach before signing.

Final Thoughts

Merchant cash advances can provide quick access to capital, but speed often comes at a price. Understanding these six red flags can help business owners identify contracts that may pose serious financial and legal risks. A careful review before signing can prevent costly consequences later.

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This article is for informational purposes only and does not constitute legal advice.