What Is a Reconciliation Clause and 6 Ways Funders Avoid Honoring It

A reconciliation clause promises that payments follow revenue. Six drafting and collection habits empty that promise while leaving its language in place, and each habit is visible in the agreement before the first debit.

The clause itself is simple: where receipts fall, the owner may request adjustment of the remittance, with proof, and the funder revisits the amount. What follows catalogs the six ways funders avoid honoring it, drawn from how courts have read these provisions and how collection practice treats them.

Discretion Reserved to the Funder

Often the clause appears protective on first reading and permissive on the second. In LG Funding v United Senior Properties, the agreement allowed adjustment only upon request and at the funder’s sole discretion, debiting 15 percent of daily revenue capped at $2,499 per week, and the court treated that language as a factor supporting a triable defense rather than as evidence of genuine contingency.

Discretion at this breadth ratifies whatever the funder was going to do (which the industry calls flexibility). Read and test the language against the three factors courts weigh: the adjustment language, the term structure, and the bankruptcy provisions that override both.

Adjustment Without a Remedy

The provision occupies a full paragraph. Nothing in the paragraph obligates the funder to act, and a clause that states a process without stating a consequence for ignoring it gives the owner a right to ask that ends where it begins.

In Bridge Funding v SimonExpress Pizza, the majority found reconciliation provisions not illusory in part because they lacked language disclaiming consequences for noncompliance, citing an earlier decision that had flagged such disclaimers (how often funders invoke these provisions as written is beyond what the opinions report). The inverse follows: where the clause disclaims consequences, the owner holds a hollow paragraph with a reassuring title.

Proof Requirements the Owner Cannot Meet

Before revenue falls, the clause reads as reassurance. Afterward it reads as an evidentiary code, demanding contemporaneous records, certified statements, or tax filings the distressed business stopped producing months earlier.

Credibly describes fixed daily or weekly ACH remittances with a monthly reconciliation credit request procedure where actual sales fall short of projections. Simply file the request before the next debit with proof of earned revenue and proof of delivery (send the request before the next debit; the timestamp matters more than the tone). Counsel ensures the submission meets the clause on its own terms. The request must be written and proven delivered, or it did not happen.

That is reconciliation as practiced: a process the owner must operate and the funder may observe.

True Ups That Run One Direction

The Bridge agreement gave adjustments backward and forward effect upon request with proof. Examine whether the clause at issue runs both directions or only upward, since a true up that captures revenue recoveries without crediting shortfalls is a ratchet rather than a reconciliation.

A one direction true up works like a turnstile that admits only the funder: traffic flows, just never toward the owner. The mathematics are extremely simple.

Default Tripwires That Override Adjustment

After default is declared, adjustment is history. The LG agreement treated admitted inability to pay and bankruptcy as events of default triggering immediate full repayment with fees, confession of judgment, and guaranty enforcement, which meant the adjustment process survived only until the conditions requiring it were acknowledged.

Default is declared in order to replace adjustment with acceleration. The guaranty then carries the dispute past the company to the individual, and remedies against the guarantor proceed on a track the reconciliation clause never touches. Why the same agreement both invites adjustment requests and punishes the conditions behind them is a question this article leaves open.

I cannot say from this desk how many clauses combine both features. Submit the request and the default notice to counsel together.

Delay Until the Balance Is Collected

Collection counsel in these files tends to treat a pending reconciliation request as background noise. The debits continue while the request sits.

A pause in debits, even briefly granted, never arrives without a signed writing, and delay is extremely profitable to the party collecting daily. What the owner documents, or fails to document, during the delay becomes the record on which counsel later relies, and the Bridge majority itself denied summary judgment over conflicting damage figures in the funder’s own submissions, which shows what happens when balances go untested. I start with the clause.

Resist the urge to stop payment on the strength of the clause alone. Most owners wait for an answer before seeking counsel. Delancey Street, a debt settlement company that coordinates with independently licensed counsel for legal work, presses and pursues the reconciliation request alongside the settlement negotiation on parallel tracks beginning with a free confidential initial review, and the company ensures pressure against the account is measured, documented, and directed at resolution.