MCA Contract Red Flags: What to Look for Before You Sign

Most merchant cash advance contracts run 15 to 25 pages. You get them by email, usually late in the day, usually after a broker has been on the phone with you for an hour. You're told to sign before the offer expires.

That pressure is not an accident.

The clauses that cost merchants the most money — and in some cases their businesses — are buried in the middle pages, written in legal language, and never explained on the call. This article walks through every red flag worth looking for, what each one means in plain English, and what to do if you find one.

1. Confession of Judgment (COJ)

What it is: A clause where you agree in advance that if the funder says you defaulted, a court can enter a judgment against you without notifying you first. No lawsuit. No hearing. No chance to respond. The judgment appears and your bank account can be frozen the same day.

Where to find it: Usually pages 8 to 12. Search the document for "confession of judgment," "cognovit," or "consent to judgment."

Who can use it: New York funders cannot file a COJ against out-of-state merchants — a 2019 law banned it. But New York funders can still file COJ against New York merchants, and funders based in other states may use it regardless of where you are.

What to do: If you're an out-of-state merchant dealing with a NY funder, the COJ is legally unenforceable against you — but it costs money to fight even an unenforceable judgment. If you're in New York, or dealing with an out-of-state funder, treat the COJ as a serious red flag. Ask for it to be removed. If they refuse, factor the litigation risk into your decision.

2. Irrevocable ACH Authorization

What it is: You authorize the funder to debit your bank account, and that authorization cannot be canceled by you. The only way to stop the debits is to get written consent from the funder — which they are not required to give.

Where to find it: Usually in the payment section, pages 4 to 7. Look for language like "irrevocable absent funder's written consent."

Why it matters: If your revenue drops and the fixed payment becomes unaffordable, you cannot call your bank and stop the debits the way you could with a regular ACH. The funder keeps pulling. NSF fees pile up. Your account goes negative. The only relief is the reconciliation clause — if one exists.

What to do: Make sure the contract has a reconciliation clause (more on that below). Without reconciliation rights, an irrevocable ACH on a fixed daily payment is one bad month away from a crisis.

3. Bank Credential Demands

What it is: Some contracts require you to hand over your online banking username, password, and security question answers so the funder can view your account daily.

Where to find it: Usually a separate bank information page at the back of the contract, pages 18 to 22. Look for fields asking for your bank portal username and password.

Why it matters: You are giving a third party full read access to your business bank account for the life of the contract. That is months of visibility into every transaction, every vendor payment, every customer deposit. Some agreements extend this access to facilitate collections.

What to do: This is the single biggest red flag on any MCA contract. No legitimate loan requires your banking password. Funders have other ways to verify revenue — bank statements, Plaid read-only connections, card processor data. If a contract demands your login credentials, that is a reason to walk away or demand the requirement be removed before signing.

4. Power of Attorney

What it is: You appoint the funder as your attorney-in-fact, giving them the legal authority to sign documents in your name, redirect your customers' payments to themselves, and take other actions on your behalf — usually triggered by a default event.

Where to find it: Pages 8 to 10 typically. Search for "power of attorney" or "attorney-in-fact."

Why it matters: In a default scenario, the funder can notify your credit card processor and redirect your sales revenue directly to themselves before it hits your account. Your customers pay, the money goes to the funder, you see nothing until the position is paid off.

What to do: Power of attorney triggered by default is common in MCA and not automatically disqualifying — most MCA funders include it. What you're looking for is whether the trigger is narrow (intentional default only) or broad (any event of default, including a missed payment caused by an NSF). Broad triggers on loose default definitions are the problem.

5. Punitive Default Terms and Acceleration

What it is: The moment you're in default — which can be triggered by a single missed payment, an NSF, changing your bank account, or taking additional funding — the entire remaining balance becomes due immediately. Plus a default fee, typically $2,000 to $2,500.

Where to find it: The default section and the events of default section, usually pages 10 to 15. Look for "acceleration," "full uncollected amount immediately due," and "events of default."

Why it matters: Missing one payment because your account ran short doesn't just mean a late fee. It can mean the entire unpaid balance — $40,000, $80,000, whatever remains — is due right now. Combined with the power of attorney and irrevocable ACH, this creates a rapid cascade from one bad day to a business-ending collections action.

What to do: Read the events of default list carefully. The narrower it is, the better. Ideally default is limited to intentional interference with collections — not accidental NSFs or legitimate business changes.

6. Anti-Stacking and Cross-Default Clauses

What it is: You agree not to take additional funding from any other source while this MCA is active. Taking another position — even a completely different type of financing — can trigger an immediate default on this contract.

Where to find it: Usually pages 9 to 11. Look for "negative pledge," "anti-stacking," "cross-collateral," or "unencumbered receivables."

Why it matters: Most small businesses running MCA positions are running more than one. If you have three positions and one of them has an anti-stacking clause, the other two might technically be triggering a default on the first one right now. This is also the mechanism funders use to prevent merchants from refinancing with a competitor.

What to do: If you're already carrying multiple positions, read this clause carefully before signing anything new. If you're signing your first position, understand that this clause will constrain your future options significantly.

7. Blank Fee Fields

What it is: A dollar amount field in the contract — origination fee, compliance fee, broker fee — that is left blank at signing.

Where to find it: The fee section, usually page 3 to 5. Look for any line item with a blank next to it.

Why it matters: A signed contract with a blank fee field can theoretically be completed after you sign. A compliance fee field left blank is not zero — it's undefined. Best case, it's an oversight. Worst case, it's intentional.

What to do: Never sign a contract with a blank dollar amount anywhere. Ask the funder to fill in every field, including fields they intend to be zero. A funder who refuses to write "$0" in a fee field they claim is zero is telling you something.

8. No Reconciliation Clause

What it is: Reconciliation is the right to request a payment adjustment if your revenue drops below the level the funder used to calculate your payment. Without it, the payment is fixed regardless of what your business actually earns.

Where to find it: Usually pages 4 to 6. Look for "reconciliation," "true-up," or language about adjusting payments to match a percentage of actual revenue.

Why it matters: MCA is sold as a percentage of future receivables — you pay more when business is good, less when it's slow. Without a reconciliation clause, that's not true. You pay the fixed amount regardless of revenue. This is the difference between a flexible receivables purchase and a disguised fixed-payment loan.

What to do: If the contract has a reconciliation clause, read the process carefully. Some funders make the reconciliation process so burdensome — requiring months of bank statements, multiple notices, long processing windows — that merchants never actually use it. The right exists on paper but not in practice.

What to Do With This List

Print it. Read it against any contract before you sign.

The more of these clauses a contract contains, the worse the deal. A contract with reconciliation rights and no COJ and reasonable default triggers grades very differently from a contract with all eight of the above — even at the same factor rate.

Factor rate tells you the total cost. Clauses tell you the risk. You need both numbers.

Upload any MCA contract to Gradino's Contract Check and get a full grade in 90 seconds — real APR, every red flag cited to the exact page, A through F. Free. No signup.