A merchant cash advance (MCA) is a financing option available to businesses that need quick access to capital. While MCAs can provide immediate funds, it is essential for businesses to understand the protections that exist to safeguard their interests. In this document, we will discuss the specific protection available when a business’s receivables decline after the origination of an MCA.
Protection: Reconciliation or “True Up”
In the event that a business’s receivables have declined since the origination of the MCA, there is a contractual provision that allows the business and guarantor to seek a reconciliation. This reconciliation is a financial calculation, commonly referred to as a “true up,” that helps to address the decline in receivables and provide some protection for the business.
What is a Reconciliation?
A reconciliation, in the context of a merchant cash advance, is a process that takes place when a business’s receivables have dropped since the MCA was initiated. It allows the business and guarantor to rectify the situation by recalculating the terms of the MCA based on the updated revenue figures. This ensures that the business is not burdened with unmanageable repayment obligations when their cash flow has decreased.
Purpose of a Reconciliation:
The primary purpose of a reconciliation is to provide a fair and reasonable adjustment to the terms of the MCA when a business’s receivables decline. It acknowledges the changing financial circumstances of the business and allows for a more accurate reflection of the actual revenue generated. With a reconciliation, the business can avoid the potential burden of repaying a larger amount than their current financial situation allows.
Process of Reconciliation:
When a business experiences a decline in receivables, the process of reconciliation begins. The business and guarantor notify the MCA provider about the decline and request a reconciliation. The MCA provider then evaluates the revised revenue figures and recalculates the terms of the MCA accordingly. This may involve adjusting the repayment schedule or other terms to align with the new financial reality of the business.
Benefits and Considerations:
The protection of reconciliation in a merchant cash advance offers several benefits to a business. It allows for flexibility and fairness by adjusting the repayment terms to match the actual revenue generated. This ensures that the business can continue its operations without undue financial strain. However, it is important for businesses to carefully review the terms and conditions of their MCA agreements to understand the specific details and requirements for seeking reconciliation.
Conclusion:
Businesses that opt for a merchant cash advance should be aware of the protections available to them, especially in cases where their receivables decline after the origination of the MCA. The reconciliation process, also known as a “true up,” allows businesses and guarantors to seek a fair adjustment of the MCA terms based on the current financial circumstances. This protection ensures that businesses can navigate financial challenges without being burdened by unmanageable repayment obligations.
