The surest way to spot a predatory merchant cash advance offer before you sign is to compare what the salesperson promises with what the written contract says, then work out the total payback and the daily or weekly payment in dollars. The most serious merchant cash advance red flags include a confession of judgment clause, a reconciliation promise the contract makes hard to use, pressure to stack or renew, and a cost quoted only as a factor rate.
These warning signs come from the government’s own findings. In a review of small business financing, FTC staff noted that the added cost of an MCA often equals 20% to 50% of the amount advanced, with estimated APRs in the triple digits. They also raised concerns that promised reconciliations don’t always happen. In one enforcement case, the FTC alleged that a provider told businesses no personal guaranty was required while its contracts required one.
This guide covers each red flag in the order it tends to appear. It starts with the sales pitch, then moves to the contract clauses that matter most: confession of judgment, reconciliation, and stacking and renewal terms. It also shows how to turn a factor rate and daily remittance into a true cost you can compare with term loans, SBA loans and lines of credit. It ends with a pre-signing checklist you can use on any offer you receive.
What makes a merchant cash advance offer predatory?
A merchant cash advance is not predatory by nature. It is a legal form of business financing. What makes a specific offer predatory is how it is sold, written and collected, and federal regulators have pointed to particular terms and behaviors to watch for.
In plain terms, an MCA provider buys a fixed amount of your future sales and collects it through automatic debits, usually daily or weekly. FTC staff describe the product as a high-cost, short-term purchase of future receivables, often sold through brokers and lead generators. That same review found marketing that was aggressive and possibly misleading, from providers and brokers alike.
The FTC staff’s summary of small business financing issues adds three more concerns. Frequent payments can strain cash flow, with estimated APRs reaching triple digits. Promised true-ups, or reconciliations, sometimes never happen. Collection tactics can be abusive, and confessions of judgment were flagged as a particular concern.
The sections below look closely at five contract items that deserve a careful read before you sign:
- Confession of judgment: a clause that can let a funder get a court judgment against you without a normal lawsuit.
- Reconciliation clause: whether, and how, your payments adjust if sales fall.
- Stacking: taking a second or third advance on top of one you are still repaying.
- Personal guarantee: whether you are personally on the hook, even if a salesperson said you would not be.
- Fees: charges that raise your real cost beyond the factor rate.
If you are new to MCAs, it may help to first read how a merchant cash advance works, from factor rate to daily remittance, then come back to this checklist.
This article is general information, not legal advice. For questions about a specific contract, talk with a business attorney.
Sales-pitch red flags: when the promise and the contract don’t match
The clearest warning sign is a gap between what you’re told on the phone and what the contract says. If the two don’t match, the contract is what you’ll be held to. Real enforcement cases show what that gap can look like.
What the FTC alleged in real cases
- “No personal guaranty,” but the contract required one. The FTC alleged that RCG Advances (Richmond Capital) told businesses they wouldn’t need a personal guaranty, while its contracts required one. The case ended in an industry ban and refunds of more than $2.7 million.
- Less money than promised. The FTC alleged that Yellowstone Capital misled businesses about how much funding they would actually receive. The company agreed to a settlement of more than $9.8 million.
How to check the pitch against the paperwork
- Get the net amount in writing. Before you sign, ask for the exact dollar amount that will land in your bank account after every fee. Compare it with the amount you were quoted.
- Find the guaranty and collateral language. If someone said “no personal guaranty,” search the contract for “guarant,” “collateral” and “security interest.” Ask for any spoken promise to be put in writing.
- Ask who the actual funder is. FTC staff noted that MCA providers often sell through large networks of brokers and lead generators. The person pitching you may not be the company whose name is on the contract. Get the funder’s legal name and check it yourself.
- Be wary of a review that seems too thin. Knowing what legitimate MCA funders usually ask to see, such as recent bank statements and deposit history, makes it easier to spot an offer built on promises instead of your actual numbers.
MCA confession of judgment: the clause to read first
Read this clause before anything else, because it can decide what happens if the relationship goes wrong. A confession of judgment is a document you sign up front that lets the funder get a court judgment against you without a contested lawsuit if it says you defaulted. In practice, you may not get a chance to tell your side before the judgment is entered.
The risk is not hypothetical. In its case against RCG Advances (also known as Richmond Capital), the FTC alleged that the company made businesses and their owners sign confessions of judgment and then used them to seize personal and business assets in ways the contracts did not allow. That case ended in an FTC action that banned Richmond Capital and its owner from the merchant cash advance industry.
What federal law does and doesn’t cover
The federal Credit Practices Rule (16 CFR 444.2) treats a confession of judgment as an unfair practice, but only in credit extended to consumers. A merchant cash advance is a business financing contract, so that federal rule does not automatically protect you. FTC staff also noted that confessions of judgment were flagged as a particular concern at its small business financing forum.
Rules on confessions of judgment vary from state to state. If you’re unsure how they apply to you, a business attorney licensed in your state can review the contract before you sign.
A practical step before you sign
Ask the funder or broker directly whether the contract or any side document includes:
- A confession of judgment
- A warrant of attorney, which is language authorizing someone to confess judgment on your behalf
- A waiver of notice or of your right to be heard before a judgment
Get the answer in writing. Then check the actual documents, including every attachment and addendum, rather than relying on a summary or a verbal assurance.
Reconciliation clause: will payments adjust when sales drop?
Payments adjust only if the contract says so in writing and the funder actually follows through. An MCA is structured as a purchase of a share of your future receivables, so repayment is supposed to rise and fall with your sales. In practice, many advances collect a fixed daily or weekly debit that only estimates that share. The reconciliation (or “true-up”) clause lets you ask the funder to compare what it debited with what you actually sold, then adjust future debits to match.
This clause matters most in a slow month, which is exactly when it may not work as promised. FTC staff noted concerns that some providers don’t carry out the reconciliations they promise when a business’s sales fall. In its case against Yellowstone Capital, the FTC alleged the company kept withdrawing money after businesses had repaid the full amount. The FTC also alleged that refunds of those overpayments could take weeks or months.
Questions to answer before you sign
- Is reconciliation written into the contract? A sales rep’s verbal assurance is not enough. Find the clause by name and check whether adjustments are left to the funder’s “sole discretion.”
- How do you request it? Find out whether you need to use email, an online portal or written notice to a specific address, and how often you’re allowed to ask.
- What documents are needed? Ask which records the funder requires, such as bank statements or card-processor statements, and for what time period.
- How quickly must the funder respond? Look for a stated deadline to review your request, adjust the debit and refund any excess.
Keep your own running tally
Don’t rely on the funder’s balance alone. Log every debit in a simple spreadsheet and subtract it from the total payback amount shown in your contract. This tells you when you’re close to finished and helps you spot any withdrawal that shows up after the balance reaches zero. If that happens, notify the funder in writing right away, keep copies of your records and ask your bank what options you have for stopping further debits.
MCA stacking and renewal pressure
If someone urges you to take a second advance while the first is still being collected, treat that as a warning sign. Stacking can turn one daily payment into two or three, all drawn from the same deposits.
In their staff perspective on the FTC’s “Strictly Business” forum, FTC staff describe stacking as a business taking several merchant cash advances at the same time against the same future receipts, sometimes just to keep up with existing payments and stay open. The same paper also raises concerns about forced renewals. It notes that the industry relies heavily on brokers and lead generators, and that some of their marketing can be aggressive and possibly misleading.
Red flags to watch for
- Early second-position pitches: A broker offers a second or third advance before your first one is meaningfully paid down.
- Renewals that mostly pay off the old balance: Most of the “new” money goes to retiring what you already owe. Little reaches your account, and you start over with a new payback amount.
- Offers framed as the only way out: Another advance is presented as the fix for trouble keeping up with the first one.
What to check in the contract you already have
Before you sign anything new, reread your current agreement. Look for:
- Language that bars additional financing, or requires the funder’s consent before you take another advance.
- How the contract defines “default,” and whether taking new financing counts as one.
- What the funder is allowed to do if it declares a default.
If stacking feels tempting because your sales rise and fall with the seasons, a better first step may be to build a cash plan for slow months before you take on a second advance. That way a dip in sales doesn’t push you into a rushed decision.
Fees, factor rate and daily remittance: finding the true cost
The true cost of a merchant cash advance is the gap between the cash you actually receive and the total you pay back, measured against how fast it leaves your account. A low-sounding factor rate can still be expensive when payments are taken daily over a short term.
What regulators have flagged about cost
According to FTC staff’s review of small business financing, a business typically repays the advance plus a factor often between 20% and 50% of the amount, and estimated APRs can reach the triple digits. FTC staff also noted that many of these products charge a flat fee rather than interest, so paying off early may not lower your cost. Ask in writing whether an early payoff discount exists and exactly how it is calculated.
Payment frequency matters too. In its case against Richmond Capital, the FTC described MCAs as advances repaid through daily withdrawals from a business’s bank account. Small daily debits can add up to a heavy share of your weekly cash flow.
Red flag: you receive less than you were told
Watch for fees taken out of the funded amount that were never clearly disclosed. In its complaint against Yellowstone Capital, the FTC alleged that businesses were misled about how much funding they would receive. If the deposit doesn’t match the offer, stop and ask why before you sign.
How to check any offer
- Funded amount: the advance stated in the contract.
- Net amount received: what lands in your account after every fee.
- Total payback: the full amount you’ll repay.
- Debit amount and frequency: how much is taken, and whether daily or weekly.
- Estimated term: how long repayment should take at your current sales.
With those five numbers, you can run the numbers in our merchant cash advance calculator and compare factor rate and APR side by side against a term loan or line of credit.
MCA contract terms to avoid: your pre-signing checklist
Before you sign, read the contract with this list next to you. If any item shows up, ask questions and get the answers in writing.
- A confession of judgment or a waiver of notice. In its case against Richmond Capital, the FTC alleged that businesses were forced into confessions of judgment.
- A personal guarantee or collateral that differs from what you were told. The same Richmond Capital complaint alleged that salespeople said “no personal guaranty” while the contracts required one.
- No written reconciliation process. FTC staff noted concerns that promised true-ups or reconciliations don’t happen. If the salesperson describes a reconciliation, the contract should spell out the steps.
- Limits on other financing that push you toward stacking. Look for terms that restrict other funding while making renewals with the same funder the easy path.
- Fees taken out before funding. In a separate case, the FTC alleged that businesses were misled about how much funding they would receive. Compare the deposit amount to the advance amount.
- Debit authority with no clear stop. That case also alleged that withdrawals continued after balances were repaid, and that refunds took weeks or months. The contract should say when debits end.
A fair note: an offer can include a personal guarantee and still be legitimate. What matters is that the guarantee is disclosed plainly and matches what you were told.
If you run into deceptive practices, you can report them to the Federal Trade Commission. The cases above show the FTC acts against merchant cash advance operators that mislead small businesses.
If you’d like to compare offers with clear terms, you can see your funding options with a no-cost application at funding-today.com or call (833) 632-3050. For more reading, browse our more funding guides for small business owners.
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Frequently asked questions
Is a confession of judgment in a merchant cash advance contract legal?
It depends on where and how the contract is enforced, so there is no single answer. The federal Credit Practices Rule treats a confession of judgment in consumer credit as an unfair practice. That rule covers credit extended to consumers, so it does not automatically protect a business that signs a merchant cash advance.
Because that federal protection may not apply, assume any confession of judgment you sign could be used against you. Ask a business attorney licensed in your state to review it before you agree.
Can an MCA funder keep debiting my account after I’ve paid the full amount?
It shouldn’t, but regulators have alleged it happens. In one case, the FTC said a cash advance firm kept withdrawing money after balances were repaid and took weeks or months to refund it. The firm agreed to pay more than $9.8 million to settle.
To protect yourself, keep a running record of every debit, compare it with the total payback amount in your contract, and request a written payoff letter as you near the end.
What is MCA stacking, and why is it risky?
Stacking means taking a new merchant cash advance while one or more earlier advances are still being repaid. FTC staff described stacking and forced renewals as concerns in its review of small business financing, which characterized MCAs as high-cost, short-term purchases of future receivables.
The risk is simple arithmetic. Each advance takes its own cut of your deposits. When several funders are pulling at once, a slow week can leave too little cash for payroll, rent or inventory.
How much does a merchant cash advance usually cost compared with what you receive?
Expect to repay noticeably more than you receive. FTC staff noted that the factor is often 20% to 50% of the amount advanced, with estimated APRs in the triple digits. Flat fees and daily or weekly repayment can push the effective cost higher than the factor alone suggests.
Before you sign, ask for three numbers in writing: the cash you will actually receive after fees, the total payback amount, and the expected repayment period.
What should I do if an MCA broker’s promises don’t match the contract?
Trust the contract, not the pitch, and don’t sign until the two match. In one FTC case, a funder allegedly claimed no personal guaranty was required while its contracts required one. The company and its owner were later banned from the industry, and more than $2.7 million was returned.
Ask the broker to put every promise in writing, have an attorney review any mismatch, and walk away if the terms aren’t corrected. If you’d like to compare options, you can see your funding options with a no-cost application at funding-today.com or call (833) 632-3050.
Sources
- Small business financing: Staff Perspective outlines issues · Federal Trade Commission · 2020-02-26
- "Strictly Business" Forum: Staff Perspective · Federal Trade Commission · 2020-02
- FTC Action Results in Ban for Richmond Capital and Owner From Merchant Cash Advance and Debt Collection Industries and Return of More Than $2.7M to Consumers · Federal Trade Commission · 2022-06-06
- Cash Advance Firm to Pay $9.8M to Settle FTC Complaint It Overcharged Small Businesses · Federal Trade Commission · 2021-04-22
- 16 CFR Part 444, Credit Practices (Section 444.2 Unfair credit practices) · U.S. Government Publishing Office (Code of Federal Regulations) · 2021-01-01
This article is general information, not legal advice. Laws and deadlines vary by state and change over time; check the linked sources or speak with a licensed attorney about your situation.
