8 Contract Clauses to Read Before Signing a Business Debt Consolidation

The consolidation agreement deserves slower reading than the advances it replaces. An owner who survived stacked daily debits arrives at the signing table exhausted, and exhaustion signs papers that fresh eyes would question. The clauses below decide what the new payment buys, and they deserve an hour each before the signature goes down.

New York courts read MCA paper by substance rather than label, and the method transfers neatly to consolidation review. What follows applies that method to eight clauses, each tested against opinions that quoted the actual language.

Funded Amount Against Purchased Amount

The LG Funding opinion quotes an agreement in which the merchant sold future receivables for a purchase price of one hundred thousand nine hundred ninety dollars against a purchased amount of one hundred twenty nine thousand two hundred sixty seven dollars and twenty cents. The gap between the two figures is the entire economics of the transaction. A consolidation agreement that states only the new payment, without separating cash advanced from total payback, withholds the single comparison that matters.

In a later New York decision, the funder advanced funds for twenty five percent of future revenues until an agreed amount greater than the advance was paid. Percentages describe the mechanism. The two dollar figures describe the price.

Reconciliation Mechanics

Reconciliation is the clause that adjusts the remittance when revenue falls, and its wording decides whether the adjustment is a right or a favor. The LG clause allowed adjustment upon request at the funder sole discretion, language the court held sufficient to support a triable usury defense. The Bridge majority enforced provisions that modified the remittance retroactively and prospectively upon request with proof of earned revenue, finding them not illusory precisely because sole discretion language was absent.

A trial court on a full fraud record called mandatory reconciliation a total sham where it never occurred and held permissive reconciliation insufficient on those facts. A concurring judge in the later appellate decision proposed a harder test, asking whether reconciliation was illusory in practice, for instance where a funder keeps requesting documentation while continuing to debit. The concurrence does not bind, though counsel should read new paper against its warning as well as the majority rule, since practice rather than text decides what the clause delivered. The lesson for the new paper is blunt: demand the procedure, the proof standard, and the timeline in text, since a reconciliation right the funder administers at pleasure (a phrase that should never survive counsel review) is decoration rather than protection.

Default Triggers and Acceleration

Default clauses convert a manageable payment into an immediate full balance, and the triggers extend further than missed payments. The LG agreement made the full uncollected amount plus fees, including reasonable attorney fees, due upon default, with written admission of inability to pay and bankruptcy listed as events of default. The Richmond record added encumbrance of collateral and pledging receivables elsewhere as acceleration triggers, alongside representations that receivables stood free and clear of other loans.

Six months after signing, the owner who stacked a new advance atop the consolidation learns what the free and clear representation cost. Counsel should read the section as if each defined term were loaded.

Confession of Judgment

The LG agreement required delivery of a confession upon bankruptcy filing, for the funder to enter. The Richmond court treated confessions filed on false affidavits as fraud, with individuals instructed to file them against guarantors. Current New York procedure demands a signed sworn affidavit stating the sum and the facts of the debt, with filing windows and county restrictions, while Texas voids confession provisions in covered commercial sales based financing contracts.

No federal ban on the device was verified. The clause must be read under the law of the governing state, and a consolidation agreement that reintroduces a confession the client thought retired deserves the longest pause of the review.

Personal Guarantee Scope

The LG individuals guaranteed performance of all representations, warranties, and covenants of the company, and the Bridge guarantor backed entity performance with a claim the court tied to the underlying contract action. The Richmond funders required guarantees framed as performance rather than payment undertakings, a framing whose legal consequences beyond the label remain unbriefed in the captured material. Federal charges separately accused operators of demanding guarantees after representing none would be required.

Security Interest and Lien Release

Consolidation should retire old liens as well as old balances, yet payoff alone files nothing at the records office. Termination follows a statutory procedure running from a signed debtor demand, with a twenty day clock and limited debtor self filing rights, and the federal order against the barred operators required UCC termination statements alongside dismissal of customer cases. The new agreement should therefore state who obtains terminations of prior filings, by when, with copies to the client, since a lien that survives payoff continues to cloud the next financing.

A lien that follows collateral into proceeds can outlive the handshake that supposedly settled it. Paper the release with the same care as the payment.

Debit Authorization and Account Control

The LG debit authorization allowed fifteen percent of daily revenue capped at two thousand four hundred ninety nine dollars per week. That specificity is the standard to demand: percentage, cap, account, and timing stated together. Deposit account control in the commercial code rests on a signed record among debtor, secured party, and bank, and redirection of assigned receivables follows notification rules that require reasonable identification of the rights assigned, with proof furnished seasonably on request.

Texas conditions automatic deposit account debits in covered transactions on a validly perfected first priority interest in the recipient accounts receivable. The rule is narrow and instructive. Even where it does not apply, counsel should ask what interest backs the debit right.

Broker Compensation and Dispute Forum

Someone assembled this transaction and was paid for the assembly. Texas disclosure law for covered offers requires broker compensation figures among its specified disclosures, and federal endorsement guidance requires disclosure of material relationships affecting credibility. Arbitration provisions, where present, are generally enforceable subject to generally applicable contract defenses, so formation, scope, and waiver questions belong in the review.

Delancey Street offers a free confidential initial review for businesses considering consolidation of MCA and related debt. The company operates as a settlement company and coordinates agreement review with independent counsel, since it is not a law firm. The purpose is to ensure the new paper retires old obligations rather than stacking fresh ones, and to ensure every clause above shows its meaning before signature. Read the agreement, then read it again, since the second reading is where the price usually appears.

Eight clauses. One signature.