Irreconcilable Differences: How MCA Abuse of “Reconciliation Rights” Threatens Collateral

Merchant Cash Advance (MCA) agreements have become a prevalent form of alternative financing, particularly among small and distressed businesses. Marketed as sales of future receivables rather than traditional loans, these agreements allow funders to withdraw fixed daily or weekly payments directly from a business’s bank account until a predefined “purchase amount” has been satisfied.

But when revenues decline—as they often do in distress scenarios—the MCA structure can collapse under its innate contradictions. The core issue? Payments no longer reflect the agreed-upon percentage of receivables, exposing businesses to overcollection, liquidity crises and potentially unlawful conduct.

One key safeguard—often buried in fine print—is the reconciliation clause. In theory, this provision allows merchants to request an adjustment of future payments when revenues fall below expectations. But in practice, many MCA funders either ignore reconciliation requests altogether or use procedural hurdles to render the right meaningless.

For secured lenders, this matters. When a borrower has stacked MCA positions that siphon cash flow and ignore contractual limits, the prospects for repayment, restructuring or refinancing degrade rapidly. The abuse of reconciliation clauses isn’t just a problem for borrowers—it undermines lender collateral positions and can derail workout efforts.

When MCA funders fail to reconcile in a declining revenue environment, the fixed daily withdrawals quickly exceed the originally contracted percentage of receivables. In essence, the funder begins extracting a larger share of the business’s cash flow than agreed, intensifying the financial strain. This, in turn,  accelerates borrower distress and can trigger defaults and creditor enforcement actions—such as UCC 9-406 notice redirection—in a self-reinforcing downward spiral. For senior secured lenders, this shift is more than academic: it can instantly convert a marginal collateral position into an untenable one, as the unauthorized increase in cash diversion directly erodes the lender’s priority claim on revenue streams.

Understanding Reconciliation: Not About Payoff, But About Proportionality

Unlike amortizing loans, MCA contracts structure repayment as a variable share of a business’s receivables—typically 10% to 15% of daily or weekly revenues—until the full “purchased amount” is collected. The funder assumes the risk that repayment may take longer if revenues decline.

In reality, however, many MCA providers convert this supposed “variable” repayment into a fixed daily debit, calculated on assumed revenue streams that may never materialize. The result? A payment schedule that resembles a loan, without the regulatory obligations.

Reconciliation is meant to restore balance. If a merchant’s actual receivables decline, they are contractually entitled to request a reconciliation: a retrospective comparison of what’s been collected versus what should have been collected based on the agreed percentage. If overcollection has occurred, the funder must credit the overage, refund it or reduce future debits accordingly.

Misrepresenting the Reconciliation Clause: “It’s in the Contract—You’re Protected”

Some MCA companies manipulate the very existence of reconciliation language to deter merchants from seeking outside help. It’s common to hear:

“You don’t need to work with a consultant or advisor. The reconciliation clause already protects you.”

While technically true, this claim is misleading.

In practice, MCA funders rarely implement reconciliation proactively. They require the merchant to initiate the request—and often stall, impose onerous documentation requirements or ignore the request outright. Some continue collecting fixed daily amounts while pointing to the reconciliation clause as evidence of good faith.

This creates a dangerous illusion of protection. Unless enforced, the clause is meaningless—and in most cases, merchants lack the expertise or resources to hold funders accountable.

“Most business owners don’t even know they have a right to reconciliation—and even when they do, the process is often designed to fail,” says Gerard Celmer, Chief Operating Officer at Rise Alliance. “MCA funders will claim the right exists, but then impose layers of opaque documentation requirements and tight procedural deadlines. If anything is out of order or delayed, the request is deemed withdrawn. It’s how they deny the right without ever saying no.”

Even when agreements contain timelines, contact procedures and documentation guidelines, discretion overwhelmingly favors the funder. A merchant might be required to produce exact records within 10 days—or risk the request being deemed “withdrawn.” Funders may claim insufficient documentation or request additional data ad infinitum. The clause’s presence in the contract gives the appearance of protection—but without enforcement, it becomes a shield against liability rather than a tool for relief.

“That’s why having an advisor who understands how to assert the right—and apply pressure when it’s stonewalled—can make all the difference,” Celmer adds.

Regulatory Scrutiny: New York’s Attorney General Takes a Stand

This isn’t theoretical. In 2020, the New York Attorney General (NYAG) filed an enforcement action against Yellowstone Capital, one of the most visible MCA firms in the space. The complaint alleged that Yellowstone, along with a group of almost 20 other MCA lenders, routinely ignored reconciliation provisions, even when merchants submitted documentation showing revenue declines.

Attorney Shane Heskin of White and Williams LLP, a leading legal authority on MCA-related litigation, notes that while reconciliation provisions are meant to offer protection, invoking them can come at a cost. “As important as this provision is, merchants have always needed to proceed cautiously with requesting reconciliations because they often trigger retaliation from MCAs and even their originating brokers,” Heskin explains. “Retaliation has taken the form of hyper-aggressive collection activities or a multitude of responsive threats.”

According to the NYAG, Yellowstone continued to debit fixed daily amounts regardless of actual receivables, violating Executive Law § 63(12) and General Business Law §§ 349 and 350. The case drew national attention and framed Yellowstone’s conduct as deceptive business practices and false advertising.

That same year, Richmond Capital Group LLC was also charged by the NYAG with abusive tactics and failure to honor reconciliation provisions. The firm claimed its product was revenue-based but, in practice, refused to adjust payments when merchants qualified under their agreements. (1)

For lenders, these actions underscore the risk of misalignment between contractual representations and actual conduct—particularly when MCA providers are stacked ahead of senior secured creditors in the cash flow waterfall.

Case Study: Par Funding and the Consequences of Deceptive Practices

In March 2025, Joseph LaForte, CEO of Par Funding, was sentenced to 15½ years in federal prison on charges of RICO conspiracy, securities fraud and tax evasion. Par Funding aggressively marketed MCA products, misrepresented risk to investors and employed coercive collection tactics—including threats of violence. (2)

While the case focused on investor fraud, it again raised broader questions about industry practices—including failure to honor reconciliation rights. The message from regulators is clear: MCA agreements are under scrutiny, and funders who exploit merchants—or misrepresent the nature of their product—face mounting legal risk.

Practical Guidance: Reconciliation Matters to Lenders, Too

When your borrower is struggling to service senior debt while being drained by stacked MCA positions, understanding reconciliation rights is critical to preserving enterprise value.

Here’s how borrowers should (ideally) exercise that right:

1. Review the Agreement
   Locate clauses referencing reconciliation, adjustment of daily debits or recalculation tied to revenue drops. The trigger is typically a formal merchant request.
2. Monitor Revenue Trends
   Compare actual daily and weekly receivables to the assumed levels that underpinned the fixed daily debits.
3. Submit a Formal Request
   The request should be in writing, cite the clause and include supporting documentation like bank statements or processor reports.
4. Send via Trackable Means
   Certified mail or verifiable email ensures a record of delivery.
5. Document All Responses (or Lack Thereof)
   If ignored or denied, borrowers may have grounds to file a complaint with the state AG or consumer protection bureau.

Legal Implications of Noncompliance

MCA funders often position themselves outside of loan regulation—but reconciliation abuse may expose them to broader liability.

In jurisdictions like New York, regulators have made it clear: failure to reconcile isn’t just a contract issue—it may constitute deceptive business conduct. For secured lenders, this behavior can also complicate lien enforcement, disrupt refinancing timelines and increase exposure in bankruptcy or UCC sale scenarios.

Repeated failure to adjust for receivables may support claims of misrepresentation, bad faith or even unlawful lending activity. For lenders managing distressed borrowers with MCA exposure, these are red flags warranting immediate review.

Conclusion: Reconciliation Is a Right—But It’s Rarely Honored Without Pressure

As scrutiny of MCA practices intensifies, the reconciliation clause is becoming a key battleground. It offers merchants a contractual right to adjust payments—but only if enforced.

Too often, MCA funders leverage opacity and delay, exploiting merchants’ lack of legal sophistication. For lenders with exposure to distressed borrowers, understanding how (and whether) reconciliation is being honored is crucial to assessing viability, negotiating restructuring paths or asserting priority in recovery scenarios.

Make no mistake: this isn’t something most borrowers can do on their own.

The Reality: An MCA Borrower Likely Can’t Do This Alone

While the right to reconciliation may appear straightforward, asserting it rarely is. MCA contracts are not designed to be transparent—they are crafted to be enforceable by the funder. Requests are often stonewalled, and discretion is used as a weapon. For most business owners—especially those in distress—successfully enforcing reconciliation rights requires professional advocacy. Whether through legal counsel or experienced restructuring advisors, external pressure is often the only way to ensure those rights are respected and your collateral isn’t silently eroded.

Footnotes:

1. People of the State of New York v. Richmond Capital Group LLC, et al., Sup. Ct. N.Y. County, Index No. 452208/2020. Press release ↩
2. United States v. Joseph LaForte, U.S. Attorney’s Office–Eastern District of Pennsylvania. Press release ↩