Merchant cash advance client sitting with attorney

In Focus: Confession of Judgments

Over the past few years, it has become increasingly common for merchant cash advance providers and other high-risk business lenders to include a clause in commercial financing products called a Confession of Judgment (COJ). By utilizing a COJ, a funder can avoid a lengthy legal process and quickly move to seize the business’s assets in the event of a default. 

If your business is struggling with the terms of an MCA agreement, the best way to protect your rights is to consult with an experienced debt relief specialist. If you are considering a merchant cash advance to access working capital, it is critically important to understand how a COJ can impact your business. 

What is a Confession of Judgment?

A confession of judgment clause is typically included in a funding agreement whereby the merchant accepts liability for the cash advance and waives all legal defenses if certain conditions trigger a default. In short, a COJ allows the MCA provider to (1) file a judgment with the court without pursuing a lawsuit and (2) seize business and/or personal assets or place liens against them. By waiving all its legal rights, the business has no ability to object to the judgment. Once the COJ is filed, the court will notify the merchant, and the fund can begin levying business and personal accounts.

Why Do MCA Providers Use Confession of Judgments?

MCA providers and other lenders use COJs to mitigate their risk and increase the likelihood of being paid back by the merchant. A business is more likely to avoid breaching the MCA agreement and triggering an event of default knowing that a levy could be placed on its assets, as well the owner’s personal assets. Additionally, by utilizing a confession of judgment, a merchant will be more inclined to avoid taking additional cash advances (which is not uncommon) out of fear of over leveraging the business and increasing the risk of a default.

Consequences of Defaulting on an MCA with a Confession of Judgment?

If a Confession of Judgment is filed against your business, having a levy placed against it could force the company into bankruptcy. If your business cannot meet the financial obligations of an MCA agreement, contact an experienced debt relief specialist. 

A properly structured funding agreement should include a reconciliation clause that provides relief if you are facing a receivables shortfall by allowing you to renegotiate the payment terms. 

You must adhere to the requirements of the MCA agreement, not the least of which is providing documents to the funder demonstrating the business’s prospects for returning to profitability. 

In turn, the reconciliation clause requires the funder to restructure the payment terms; failing to do so may constitute a breach of contract. Ultimately, working with an experienced debt relief professional can mean the difference between reconciling your merchant cash advance and losing your business.