The clauses that decide your worst month
Everyone reads the rate. Almost nobody reads the three clauses that determine what happens if a month goes badly. Those are the ones worth ten minutes.
A funding contract has two halves. One sets the price. The other sets what happens when things do not go to plan.
Owners negotiate hard on the first and sign the second without reading it. The second half is where the real exposure sits, and none of it is hidden. It is just written in language designed to be skimmed.
The three that matter
Find these three before anything else. They are usually in the last few pages, or in a separate document attached to the agreement.
- Personal guaranteeMoves the debt from the business to you personally if the business cannot pay.
- UCC-1 financing statementA public filing claiming an interest in business assets. Visible to every other funder.
- Confession of judgmentAn advance agreement that a court may enter judgment against you without a trial.
The rate decides what a good month costs you. These three decide what a bad one does.
The personal guarantee
Most small business funding involves one, and that is not unreasonable: a funder lending to a young company wants the owner committed. What varies enormously is its scope.
Read whether it is limited to a stated amount or unlimited, whether it survives if you sell the business, and whether a spouse is being asked to sign.
A guarantee capped at the amount advanced, ending when the advance is repaid.
An unlimited guarantee, one covering future advances you have not yet taken, or a request for a spouse's signature you did not expect.
The UCC filing, and why it blocks your next deal
A UCC-1 is filed with the state and is public. Its practical effect catches owners out: the next funder searches, sees a blanket lien over your assets, and either declines or prices for second position.
The scope is the thing to read. A filing against specific equipment is narrow. A blanket filing over all assets, now and in future, ties up everything.
A filing limited to the specific asset being financed, and a written commitment to file a termination once repaid.
A blanket lien over all present and future assets for a modest advance, or no answer on when it gets released.
Confession of judgment
This is the most severe clause in the category. Signing one means agreeing in advance that if the funder says you defaulted, they may enter judgment against you without suing, without notice, and without you getting to argue.
The practice became notorious after investigative reporting, and New York, where a great many of these agreements are governed, amended its rules in 2019 to stop confessions being filed against debtors based outside the state.
No confession of judgment in the agreement at all. Many reputable funders no longer use them.
A separate affidavit sent alongside the contract, presented as routine paperwork, that you are asked to sign and notarise.
Sources below. The 2019 amendment followed Bloomberg News reporting on the use of confessions of judgment in this industry.
Five things to get in writing
None of this requires a lawyer to ask. All of it is easier to ask before you sign than to discover afterwards.
- The complete agreement, every pageNot the term sheet, not the summary. If they will not send it, that is your answer.
- Whether a personal guarantee is required, and its limitIn dollars, with an end point.
- Whether a UCC filing will be made, and over whatSpecific asset or blanket, and who files the termination.
- Whether any confession of judgment is includedIncluding in a separate document sent with the pack.
- What counts as defaultMissing one payment, a dip in deposits, or changing bank accounts can all qualify in some agreements.
General information, not legal advice. Contract terms, enforceability and state law vary considerably, and the rules described here have changed over time and may change again. Nothing here should be relied on as a statement of the law in your state. If you are reviewing an agreement, or are already in difficulty under one, speak to a qualified attorney. Cashman Sam is not a bank, a lender or a broker of record, and is compensated by funding partners when a deal completes.
Sources
- New York State Senate: Governor signs Hoylman-Dinowitz legislation to close the confession of judgment loophole exploited by predatory lenders
- Federal Trade Commission: Court enters $20.3 million judgment against merchant cash advance operator Jonathan Braun
- Federal Trade Commission: RCG Advances, LLC case file
