How to Review a Business Funding Agreement: MCA, Loan & Note
A practical review order for any business funding offer — MCA, term loan, line of credit, or promissory note — starting with the one number the offer hides: the real cost.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not legal advice.
Overview
Business funding comes in many forms — merchant cash advances (MCAs), term loans, lines of credit, and promissory notes — and the paperwork is written to make the cost look small and the funder’s remedies look routine. The most important step is to translate the deal into a real annualized cost and find the clauses that can take your business if cash flow dips.
Review in this order: the true cost (total payback vs amount funded, and the effective APR), the repayment mechanics (daily/weekly ACH), reconciliation rights, the confession of judgment, the personal guaranty, liens, and the default triggers.
Topics to check
MCAs quote a "factor rate" (e.g., 1.49) instead of an interest rate. A 1.49 factor on $100,000 means you repay $149,000 — and if that is collected over a few months by daily ACH, the effective APR is often 40% to well over 350%. Convert the deal: divide total payback by the amount funded, then estimate the annualized rate over the realistic repayment period.
Several states (California and New York among them) now require commercial-financing disclosures, including an estimated APR, precisely because the factor-rate format hides the cost.
California DFPI — Commercial Financing DisclosuresThe federal Truth in Lending Act applies to consumer credit, not business loans, so business funding offers do not have to show an APR the way a consumer loan does. MCAs go further by structuring the deal as a "purchase of future receivables" rather than a loan, which they argue places them outside state usury caps entirely.
That structure is exactly why review matters: the protections you would expect on a personal loan are not automatically there.
Usury (Cornell LII Wex)After the cost, the clauses that matter most are the ones that trigger and enforce default: a confession of judgment (which lets the funder get a judgment without a hearing), a personal guaranty, a blanket UCC-1 lien on all your assets, anti-stacking restrictions, and broad default definitions tied to your bank account or revenue.
These convert a cash-flow problem into a personal and business catastrophe, so weigh them before signing.
Key takeaways
- Translate any factor rate into total payback and an estimated effective APR first.
- Business funding is not covered by the consumer Truth in Lending Act; MCAs also dodge usury caps.
- Some states now mandate commercial-financing disclosures, including an estimated APR.
- The dangerous clauses are confession of judgment, personal guaranty, blanket liens, and broad defaults.
- Build a short list of the cost and the remedies before you sign or wire anything.
Official resources
Legal-review notes
Guide confidence marker: Medium confidence.
- APR estimates are illustrative; the real figure depends on the exact amounts, payment schedule, and payoff timing.
- Usury, disclosure, and confession-of-judgment rules vary by state and require counsel review for the specific deal and jurisdiction.
Frequently asked questions
How do I find the real interest rate on an MCA?
Divide the total amount you must repay by the amount funded to get the factor cost, then annualize it over the realistic repayment period (often a few months for daily-ACH MCAs). The effective APR is frequently many times the "factor rate" makes it look — often 40% to 350%+.
Does an MCA have to disclose an APR?
Not under federal law — the Truth in Lending Act covers consumer credit, not business funding. But several states, including California and New York, now require commercial-financing disclosures with an estimated APR for many transactions.
Is this legal advice?
No. This is general information. Enforceability of confession-of-judgment, usury, and disclosure rules varies sharply by state and by how the deal is structured — confirm specifics with a qualified attorney before signing.