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What should you ask before taking a merchant cash advance?
Ask three questions, each based on a concern FTC staff raised: how your daily payment moves with sales, how the “true-up” works if sales drop, and whether you’re being asked to sign a confession of judgment. But first, understand what a merchant cash advance is. Per FTC staff (Feb 2020), “MCA providers buy a fixed amount of a small business’s future receivables.”
General education, not legal or financial advice.
First, what a merchant cash advance is
FTC staff describe it this way:
“MCA providers buy a fixed amount of a small business’s future receivables.” (FTC staff, Feb 2020)
That structure is why the questions below are about payments, reconciliations, and contract terms, not just the headline amount.
Question 1: How does my daily payment move?
“Daily payments may rise or fall based on daily sales.” (FTC staff, Feb 2020)
May is the important word. Ask exactly how your daily payment is calculated and how it changes when sales change, and get the mechanics in writing.
Question 2: If sales drop, how does the true-up work?
FTC staff flagged this concern:
“When daily sales drop, some MCA providers may not conduct promised ‘true-ups’ or reconciliations to reduce merchants’ payments” (FTC staff, Feb 2020)
If a true-up or reconciliation is promised, ask how it works, when it happens, and who starts it. Get those answers in writing.
Question 3: Are you asking me to sign a confession of judgment?
“Some in the MCA industry require owners to execute a confession of judgment, a document waiving their rights to contest any lawsuit to collect unpaid amounts or fees.” (FTC staff, Feb 2020)
If a confession of judgment shows up in the paperwork: talk to a licensed attorney before you sign anything like that.
The three questions, side by side
| question | why ask (FTC staff, Feb 2020) |
|---|---|
| How does my daily payment move? | ”Daily payments may rise or fall based on daily sales.” |
| If sales drop, how does the true-up work? | ”When daily sales drop, some MCA providers may not conduct promised ‘true-ups’ or reconciliations to reduce merchants’ payments” |
| Is there a confession of judgment? | ”Some in the MCA industry require owners to execute a confession of judgment…” (full sentence above) |
FAQ
What is a merchant cash advance?
Per FTC staff (Feb 2020): “MCA providers buy a fixed amount of a small business’s future receivables.”
Do merchant cash advance payments change with sales?
Per FTC staff (Feb 2020): “Daily payments may rise or fall based on daily sales.”
What is a true-up on a merchant cash advance, and why ask about it?
A true-up is a reconciliation. FTC staff (Feb 2020) noted: “When daily sales drop, some MCA providers may not conduct promised ‘true-ups’ or reconciliations to reduce merchants’ payments”.
What is a confession of judgment in an MCA?
Per FTC staff (Feb 2020): “Some in the MCA industry require owners to execute a confession of judgment, a document waiving their rights to contest any lawsuit to collect unpaid amounts or fees.” Talk to a licensed attorney before you sign anything like that.
general education, not legal or financial advice. this post is general education. it does not mean any specific financing type is available through pearl.
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Source: FTC Business Blog, “Small business financing: Staff Perspective outlines issues” (Lesley Fair, Feb 26 2020; summary of an FTC staff perspective). All quotes above are from this page.
Pearl Financing connects businesses seeking funding with lending partners. We are not a direct lender. Loan terms, rates, and approval are subject to credit review and vary by applicant. Not all applicants will qualify. Business-purpose financing only. This is not a commitment to lend.
