Glossary
What is reconciliation in a merchant cash advance?
Why reconciliation matters legally
MCA products are generally structured as the purchase of future receivables rather than loans, which affects which laws apply — particularly usury laws. Courts have scrutinized this characterization and have recharacterized some agreements as loans, particularly when: the repayment amount was fixed regardless of actual sales, the funder had the right to accelerate for any missed payment, or the merchant had no genuine right to reconcile remittances against actual revenue.
A reconciliation provision that is included in an agreement but never honored in practice provides little legal protection. The reconciliation process must be real — documented, consistently applied, and accessible to merchants who request it — to support the receivables-purchase characterization.
How reconciliation works operationally
Reconciliation typically works by comparing actual sales for a period (often monthly) against the projected revenue the remittance schedule was based on. If actual sales are materially lower, the merchant can request a remittance adjustment downward. Some agreements set specific thresholds and procedures; others give the funder broad discretion. Funders should document reconciliation requests and their disposition in the case record — both to demonstrate the provision is genuine and to protect against claims that reconciliation was improperly denied.
FAQ
Reconciliation (MCA) — common questions
Does every MCA agreement include a reconciliation right?
No. Reconciliation provisions vary significantly across agreements and funders. Regulators and some courts view the absence of a genuine reconciliation right as evidence that an agreement is a loan rather than a receivables purchase. Whether an agreement includes reconciliation is a drafting and business decision with legal implications.
Can a funder refuse a reconciliation request?
It depends on the agreement terms. Some agreements give the funder discretion; others require adjustment when specified conditions are met. Blanket refusal of legitimate reconciliation requests creates legal and regulatory risk, particularly if the MCA's receivables-purchase characterization is ever challenged.
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