Read it in this order
An advance agreement is written by the funder's lawyers for the funder's benefit, and it is usually fifteen to thirty pages. Most owners read the first page, see the amount, and sign the last. The pages between are where the money goes. Here is the order in which to read them, with what to look for in each.
1. The purchased amount and the purchase price
Near the top: "Purchase price" is what you receive. "Purchased amount" or "receipts purchased amount" is what you repay. Divide the second by the first and you have the factor rate; the agreement may not state it. $100,000 and $135,000 is a 1.35. Check this against what you were quoted on the phone before you read anything else.
2. The remittance: fixed daily amount and the specified percentage
The agreement will state a "specified percentage" of your receipts, often 10 to 25 percent, and a "fixed daily amount" or "weekly amount" the funder will actually debit. The fixed amount is what hits your account. The percentage is what the deal is supposed to represent. If sales fall, the agreement should allow you to ask that the fixed amount be reduced to match the percentage. That brings you to the clause that matters most.
3. Reconciliation
The reconciliation clause is what makes an advance legally a purchase of receipts rather than a loan. It should say that, on request, the funder will review your actual receipts and adjust the daily amount so that it equals the specified percentage, refunding any over collection. Read it for three things: whether it exists at all, whether you can request it (some agreements only let the funder initiate it), and what you must send to trigger it, which should be bank statements, not a notarised affidavit and a site visit. An agreement with no real reconciliation is an agreement that will not bend when your sales do.
4. Fees
Fees are listed in a schedule, often an exhibit at the back. Origination or underwriting fees of 1 to 5 percent are normal and come out of the purchase price; so you receive less than the amount on page one. Look also for ACH fees, wire fees, "risk assessment" fees, and above all for default and bounced payment fees, which can be $35 to $100 per failed debit and are what turn a difficult month into a disaster. Add up everything in the schedule and subtract it from the purchase price. That is your real disbursement.
5. Prepayment and early payoff
Some funders discount the purchased amount if you repay early; others do not; a few charge for it. The clause will be short and easy to miss. If you intend to refinance into a cheaper loan once the business qualifies, the early payoff terms decide whether that is worth doing.
6. The personal guarantee
Most agreements carry one, and most owners accept it. Read what it guarantees. A guarantee of "performance" means you promise the business will not breach the agreement, for example by switching bank accounts or blocking debits. A guarantee of "payment" means you personally owe the balance if the business cannot pay, which turns the purchase of receipts into a personal debt. The two words are a large difference.
7. Confession of judgment
A clause under which you agree in advance that a judgment can be entered against you without notice or a hearing. New York courts no longer enter them against out of state debtors; Texas now voids them in sales based financing; several other states restrict them. If the clause is there, strike it or do not sign. Enrichment Capital does not place agreements that contain one.
8. Events of default
The list of things that let the funder declare the whole balance due at once. Non payment, obviously. Also, in many agreements: changing banks, taking another advance, a drop in receipts beyond a stated percentage, missing a request for documents, or the owner leaving the business. The longer the list, the more ways a normal month can become a default. Ask for the list to be shortened to non payment and fraud.
9. The UCC lien
The funder will file a lien against the business's assets. That is standard. Read whether it is a general lien on all assets or limited to receivables, and whether the funder agrees to release it within a stated period after payoff. An unreleased lien from a paid off advance is a common reason a later bank loan stalls.
10. Bank account and processor restrictions
The agreement will require you to keep your business account at the named bank and your card processing with the named processor for the term, and to give the funder online read access to the account. Changing either without consent is a default. If you are planning to move banks, do it before signing, not after.
11. Stacking and the no other financing clause
Most agreements forbid taking another advance or loan without the funder's consent. Many owners sign three of these clauses with three funders, each of which the other two prohibit. A breach by stacking is the single most common route to the events of default list. If you already have a position, the honest route is a consolidation, not a second agreement that makes the first one void.
12. The whole number, on one page
When you have read the twelve, write five figures on one page: the purchase price, the total fees, what you will actually receive, the purchased amount, and the number of payments. Divide the purchased amount by what you actually receive and spread it over the term; our factor rate calculator does the arithmetic and gives you the equivalent annual rate. If the deal still makes sense with that number in front of you, sign it. If it does not, do not. And if you want a second pair of eyes, send the agreement to us before you sign. We read them every day and it costs you nothing.