To understand a business funding agreement, find four numbers before anything else: the amount funded, the total you will repay, the size and frequency of each payment, and whether you signed a personal guarantee. Those four decide what the deal actually costs and what happens if sales slow down; the rest of the contract only modifies or protects them. A funding agreement is the document that governs how money reaches your business and how it comes back out, and across the main US products — term loans, lines of credit, and merchant cash advances (MCAs) — it always spells out those repayment mechanics somewhere, even when the marketing headline shows only a rate or a monthly figure. This guide translates each part of a typical agreement into plain language, points to the clauses that quietly shift risk onto you, and shows how the cost adds up once the fine print is included, so you can sign knowing exactly what you agreed to.
Key takeaways
- The four numbers that define any funding agreement are the funded amount, the total repayment amount, the payment amount and frequency, and whether you signed a personal guarantee.
- A factor rate is a fixed multiplier set at signing (for example, $50,000 at 1.30 equals $65,000), so early payoff usually does not reduce the total unless a discount is written into the contract.
- A holdback flexes with daily sales while a fixed ACH debit does not, so a reconciliation or true-up clause is what protects your cash flow on slow days.
- A confession of judgment lets a funder win a court judgment on default without a trial; it is restricted in some jurisdictions and worth an attorney's review before signing.
- Fees such as origination and returned-payment charges add to your true cost of capital and can make a lower headline factor rate the more expensive deal.
- MCA relief through reverse consolidation lowers the daily or weekly payment only — it does not pay off, buy out, or erase existing advances.
- Common market baselines: minimums around $10,000, FICO from about 500, and funding decisions often within 24 to 48 hours, though terms are never guaranteed.
The Four Numbers That Define the Deal
However an offer is packaged, it reduces to a handful of figures. Learn to locate them on the first page and the rest of the document becomes far easier to judge.
- Funded amount. The cash that actually reaches your account. Check whether fees are deducted before disbursement, because the net you receive can be several thousand dollars less than the amount named at the top. Most established funders set a floor around $10,000.
- Total repayment amount. The full sum you owe back. On an MCA this is usually the funded amount multiplied by a factor rate — for example, $50,000 funded at a 1.30 factor is $65,000 repaid. This figure, not the rate, tells you the true cost.
- Payment amount and frequency. How much comes out and how often — daily, weekly, or monthly. Frequency bites as hard as size: a modest daily debit can squeeze cash flow more than a larger monthly one, because it never pauses for a slow week.
- Term or estimated term. A fixed loan has a set number of payments. An MCA carries an estimated term because repayment tracks sales, so the real length flexes with revenue.
If you can say those four items out loud after reading page one, you understand the shape of the deal. Everything that follows — fees, guarantees, default triggers — is a rule about how those numbers behave.
Factor Rate vs. APR: Why the Cost Looks Different
Most confusion starts here. A traditional loan quotes an interest rate and often an APR (annual percentage rate), which folds interest and fees into a single annualized number you can line up against other offers. Many short-term products, MCAs especially, instead quote a factor rate: a flat multiplier that does not change with how quickly you repay.
The practical consequence is early payoff. With a factor rate, the total is fixed at signing, so paying ahead of schedule usually does not lower what you owe unless a discount is written into the contract. With interest, faster payoff generally means less interest paid. Read the agreement to confirm which model governs your deal and whether any early-payoff savings actually exist on paper.
The comparison below is illustrative. Figures are rounded and shown for example only; your actual terms will differ.
| Feature | Factor Rate (e.g. MCA) | Interest Rate (e.g. term loan) |
|---|---|---|
| How cost is expressed | Flat multiplier (for example, 1.30) | Percentage per year (for example, 22% APR) |
| Total on $50,000 funded | About $65,000 (for example) | About $56,000 over 24 months (for example) |
| Does early payoff cut the cost? | Usually no, unless discounted in writing | Usually yes |
| Repayment source | Share of daily or weekly sales | Fixed scheduled payment |
Neither model is automatically better. Fixed factor pricing is predictable and often funds fast; interest-based loans can cost less if you repay steadily over the term. The point is simply to know which one you signed and price it accordingly.
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Holdbacks, ACH Debits, and How Repayment Really Works
Repayment mechanics deserve close reading because they reach into your bank account directly, often every business day. Two terms drive almost every arrangement.
A holdback (sometimes called the retrieval percentage) is the slice of each day's card or deposit volume the funder collects — for example, 10% of daily sales. When sales climb, the dollar amount climbs; when they fall, it falls with them. A fixed ACH arrangement instead debits the same dollar amount on a set schedule no matter what your sales did that day.
In the agreement, confirm the exact percentage or dollar figure, the debit frequency, the specific bank account authorized, and how a reconciliation or true-up works if revenue drops. A true-up clause that lets you request an adjustment on slow stretches is genuinely valuable — find it, and learn how to invoke it before you need to.
| Repayment feature | Example setup | What to check |
|---|---|---|
| Holdback percentage | 10% of daily card sales (for example) | Does it flex with slow days? |
| Fixed ACH debit | $1,200 weekly (for example) | Fixed even if sales fall? |
| Debit frequency | Each business day | How many debits per month? |
| Reconciliation | Monthly true-up on request | What proof of revenue is required? |
A missed or reversed debit can trigger a fee or even a default, so know exactly when money leaves the account and keep enough of a buffer to cover every scheduled pull.
Personal Guarantees and the Confession of Judgment
These two clauses move risk off the business and onto you personally, and both are easy to skim past. Slow down for them.
A personal guarantee means that if the business cannot pay, the funder can pursue you as an individual — your personal assets, not only the company's. Most small-business funding includes one, so its presence is normal; what varies is its breadth. Some guarantees are limited to fraud or misrepresentation, while others put you on the hook for the entire balance. Read which kind you are signing.
A confession of judgment (COJ) is more serious. In it, you agree in advance that if you default, the funder may obtain a court judgment against you without a trial and without a chance to argue your side. These clauses have drawn regulatory scrutiny and are restricted or unenforceable in some jurisdictions. If your agreement contains one, treat it as a major term and strongly consider a lawyer's review before signing.
Neither clause makes an agreement bad on its own — both are common — but they change your exposure materially. Never sign on the assumption that the business is the only party at risk.
Fees, Prepayment, and Default: The Fine Print That Adds Up
The headline cost rarely tells the whole story. The terms that swing your all-in cost usually sit deeper in the document.
- Origination or underwriting fee. A one-time charge, sometimes deducted from the funded amount so your net disbursement is lower than the stated figure.
- Returned-payment or NSF fee. Charged when a debit fails. With daily debits, a single tight week can stack several of these.
- Prepayment terms. Confirm whether paying early saves money, costs a penalty, or does nothing. On fixed-factor products, early payoff often does not reduce the balance unless a discount is stated in writing.
- Default definition and remedies. Read what counts as default — missed payments, closing the authorized account, taking on other financing, or letting a balance drop below a threshold — and exactly what the funder may do in response.
- Stacking restrictions. Many agreements bar new advances while this one is open, and taking one anyway can itself be a default.
The example below shows how quiet fees turn a lower headline factor into the more expensive deal. Figures are rounded and for example only.
| Cost component | Offer A (for example) | Offer B (for example) |
|---|---|---|
| Funded amount | $50,000 | $50,000 |
| Factor rate | 1.28 | 1.32 |
| Payback before fees | $64,000 | $66,000 |
| Origination fee | $2,500 (5%) | $0 |
| All-in cost of capital | $16,500 | $16,000 |
Add every fee to the total repayment amount to find your real cost of capital. As the table shows, the offer with the lower factor rate can end up costing more once origination and returned-payment fees are counted.
If Payments Get Tight: Relief and Reverse Consolidation
Understanding your agreement also means knowing your options before you fall behind. If the daily or weekly debits are straining cash flow, the objective is to lower the payment — not to pretend the obligation has gone away.
One tool is MCA relief through reverse consolidation. It works by lowering the daily or weekly payment amount, typically by restructuring the payment schedule so that less leaves your account each period and more working capital stays in the business. Be precise about what this is and is not: reverse consolidation reduces the payment burden; it does not pay off, buy out, or erase your existing advances. The underlying obligations remain in place, restructured into a more manageable cadence.
Whatever route you weigh, act early. Reach out before a payment fails rather than after, get any agreed change documented in writing, and confirm exactly how the new payment amount and schedule are calculated. Approval and terms depend on your specific situation and are never guaranteed, but many funders would rather adjust a schedule than pursue a default.
As market context, common baselines run to minimums around $10,000, credit profiles starting near a 500 FICO, and funding decisions often inside 24 to 48 hours. Your own agreement always controls the specifics — so read it in full, and ask questions before you sign, not after.
Frequently asked questions
What is the single most important number in my funding agreement?
The total repayment amount, not the funded amount and not the rate. On an MCA it is usually the funded amount times the factor rate — for example, $50,000 at a 1.30 factor is $65,000 to repay. Pair that figure with the payment amount and frequency and you know both what the deal truly costs and how hard it will press on your cash flow.
How is a factor rate different from an interest rate?
A factor rate is a flat multiplier fixed at signing, so the total you owe usually does not shrink if you pay early. An interest rate accrues over time, so faster payoff typically means paying less. APR annualizes interest plus fees for apples-to-apples comparison, while a factor rate does not translate cleanly into an APR. Check which model your agreement uses and whether early payoff carries any discount in writing.
What is a holdback and how does it affect my daily cash flow?
A holdback is the percentage of your daily card or deposit volume the funder collects each business day — 10% of daily sales, for example. Because it is a percentage, the dollar amount rises on strong days and falls on slow ones. A fixed ACH debit, by contrast, pulls the same amount regardless of sales. Confirm the exact figure, the frequency, and whether a reconciliation or true-up adjusts the amount when revenue drops.
Should I worry about a personal guarantee or a confession of judgment?
A personal guarantee is common and lets the funder pursue you personally if the business cannot pay, so check how broad it is. A confession of judgment is more serious: it lets a funder obtain a court judgment on default without a trial, and it is restricted or unenforceable in some places. Neither makes an agreement automatically bad, but if you see a confession of judgment, have an attorney review it before you sign.
Can I lower my payment if the daily debits become unaffordable?
Often yes. MCA relief through reverse consolidation works by lowering the daily or weekly payment amount, usually by restructuring the schedule so less leaves your account each period. It does not pay off or buy out your existing advances — those obligations remain, just at a more manageable cadence. Act before a payment fails, get any change in writing, and understand that approval and terms depend on your situation and are never guaranteed.
What fees should I look for beyond the quoted cost?
Watch for a one-time origination or underwriting fee that may be deducted from your funded amount, returned-payment or NSF fees that stack quickly with daily debits, prepayment terms that may or may not save you money, and stacking restrictions that bar new financing while the agreement is open. Add every fee to the total repayment amount to find your real all-in cost before you compare offers — a lower factor rate can lose to a higher one once fees are counted.
