Your MCA funder put reconciliation in the contract to protect themselves: here’s how to invoke it

The default notice is not the end of the option

The reconciliation clause in your MCA contract was not written for you. Funder lawyers put it there to protect the funder, specifically to prevent a court from deciding the deal was actually a loan in disguise. A loan would trigger usury law. A “purchase of receivables” doesn’t. The reconciliation provision is exhibit A that the deal isn’t a loan.

Which means when a funder refuses to honor it, they’ve just handed your defense attorney exhibit A that it was.

You missed a payment. You have a default notice. You have three to five business days before that notice can become a frozen bank account, if your contract has a confession of judgment clause and the funder decides to move. Most don’t move that fast. Some do. You probably called this week and heard “you’re in default, that option is gone” or “we can’t guarantee anything on reconciliation.” Those are negotiating positions, not legal facts. The clause governs. Here’s how to invoke it.

What reconciliation is in the contract

Open your agreement and search the PDF for “reconciliation.” It will be there, usually under a header that reads “True-Up,” “Adjustment,” or just “Reconciliation Provision.” That clause is the load-bearing sentence in the document. It is the reason your contract gets to call itself a purchase of future receivables instead of a loan with daily payments wearing a costume.

New York courts apply a three-factor test to these deals, and a working reconciliation provision sits at the top of the list. Without it, the daily pull starts to look like a fixed loan payment, which is the problem we return to in section five. The funder’s lawyers wrote the clause to protect themselves. And you’re about to use it to protect yourself.

Mechanically the clause does one job. At the end of a defined window, your daily debits get trued up against your real receipts. If they pulled more than the agreed percentage of deposits, they owe you the difference. The textbook version, pulled from a real contract and described in funder-side trade press, set the holdback at 15% of receivables and required the funder to debit or credit the deposit account for the difference, monthly, in either direction (deBanked, “Essential Provisions Your MCA Contract Must Include”).

David Mizrahi, an attorney writing in that same deBanked piece for other funders, says it plainly: “Your reconciliation clause should not be discretionary. If a merchant requests reconciliation, your agreement must require the funder to perform it without exceptions.” When the rep tells you the option is off the table, the rep is contradicting their own industry’s playbook. The clause is the deal. The next move is to invoke it, in writing, by close of business tomorrow.

The 48-hour email

Send this in writing. Not on the phone. The verbal stall (“let me check with my manager and call you back”) is the funder’s default move, and it does nothing for your record. A written request puts the funder on notice. It starts a paper trail your future attorney can subpoena. And it changes the meaning of any debit attempted after it lands, because a pull on top of a documented, unanswered reconciliation request reads as collection on a refused right, not a missed payment, and that is the fact pattern that matters six weeks from now if any of this turns into litigation.

Open your contract PDF. You are looking for two specific things. The section number containing the reconciliation clause. And the legal or compliance email address listed for formal notices, which is almost always different from the rep emailing you. CC that address. Do not skip this part.

Then send this, today or tomorrow morning at the latest:

Subject: Formal reconciliation request, [Your Business LLC], Agreement #[XXXX]

To: [your funder rep]
CC: [the legal/compliance notice address from the contract]

I am formally requesting a reconciliation under the provision in section [X] of the agreement, with supporting documentation attached.

Attached:

1. Last four months of bank statements for the deposit account on file.
2. Last two months of processor statements (Stripe / Square / Clover, whichever you run).
3. A one-page revenue narrative explaining the decline.
4. Current AR aging report.

Please confirm receipt and the timeline for the reconciliation review under the agreement.

[Name, title, phone]

Two things inside that email are doing the work and the rest is filler. The first is the four-document package. It is the one MCA-defense lawyers use for this exact letter, per the Davis Cantor template, and it is built out of records you already have open in another tab. Do not over-attach. A P&L the contract did not ask for invites the “incomplete submission” objection, which is one of the loops funders use to dismiss requests before reading them.

The second is one sentence: “I am formally requesting a reconciliation under the provision in section [X] of the agreement.” There is no apology paragraph. No “I know times are tough.” No promise to “make it right.” That sentence cites a clause the funder’s own lawyers wrote, on the record, with a CC line that proves their compliance team saw the request and the date it landed. The point of the email is to force them to run it.

The math the funder will run

After the email lands, the funder isn’t picking a number off a sympathy chart. Someone in their underwriting shop runs their own arithmetic against your bank and processor statements. You can run it first.

Here is how the math works on a representative deal. You took an advance with a 12% holdback, which sits inside the typical 8% to 22% band you’ll see across these contracts. Your trailing daily deposits when the deal funded averaged $18,000. Twelve percent of $18,000 is $2,160, the fixed daily ACH the funder set up on day one.

Deposits have since collapsed to $9,000 a day. Twelve percent of $9,000 is $1,080. That is the number the clause delivers. Not zero. Not a write-off. The same percentage of a smaller deposit base.

The gap is $1,080 a business day. Run that over 30 business days and you get $32,400 the funder either credits forward against future pulls or refunds to your operating account. Six weeks is a typical cycle; most contracts require the funder to debit or credit the account for that difference each period.

The factor rate stays the same. The total purchased amount stays the same. The daily pull shrinks, so the back end of the deal stretches past the 60 to 250 business days you signed for. That is what the clause does on the spreadsheet. Same deal, slowed down to match the revenue actually showing up in the account.

The math by itself does not move the funder. But the legal frame around it does.

The recharacterization argument as leverage

That math is your offer. The reason the funder’s collections desk will read it instead of trashing it comes down to the same factor-one test in LG Funding that put your reconciliation clause in the contract to begin with. Pull the clause out, on paper, and the deal underneath stops looking like a purchase of receivables and starts looking like a high-rate loan with no shield.

That is the lever. A documented refusal to honor a reconciliation request stops being a contract dispute and starts behaving like evidence in a recharacterization case. Carter Ledyard’s MCA litigation group says it without hedging in a post-Davis analysis: “A subsequent failure by the funder to provide reconciliation would not only constitute a breach but could evidence that a funder treated its agreement as a loan rather than an MCA”. In plain terms: the email you sent yesterday, plus a refusal or silence in writing, is exhibit material.

This is not theoretical. The New York Attorney General’s March 2024 complaint against Yellowstone Capital named “false reconciliation promises” as one of the practices that produced a $1.065 billion judgment and $534.55 million in debt cancellation across more than 1,100 New York businesses. Refused reconciliation is already sitting in a regulator’s case file as a usury indicator, with a dollar figure next to it.

A note on geography, because you’re probably not in New York. Large MCA contracts almost always pick New York law in the forum-selection clause, which is why the LG Funding doctrine reaches a borrower in Phoenix or Tampa the same way it reaches one in Brooklyn. Open your contract, search “governing law,” and you are probably in scope.

The email you drafted earlier in this piece was flat and short for a reason. You were creating an exhibit, and the funder did not know it yet. That changes the question on your file from “how much can we collect on a defaulted advance” to “do we want this email read aloud in a deposition.” Before you pull that lever, check whether you have the clause at all.

Where reconciliation doesn’t save you

Before you build the packet from section three, check that the lever exists in your contract at all. There are four situations where it doesn’t, and a reconciliation request in any of them either gets dismissed as ineligible or wastes the two days you don’t have.

The first is a lockbox or sweep-account structure. If your deposits land in a controlled account and the funder takes a fixed cut at the source, there is no daily remit percentage left to recalculate. The math from the previous section does not apply, because the formula was never running on your deposits the way it would in a standard ACH deal. Your problem is the account itself.

Second, timing. If a confession of judgment has already been filed against you, the reconciliation window has closed. You are in litigation now, and section eight covers that handoff.

Third, search your contract PDF for the word “reconciliation.” Some older or stripped-down agreements just don’t contain the clause. Fine, you can still request a payment modification, but the frame is different. Modification is settlement, and the recharacterization argument from the previous section does not bite the same way without a clause for the funder to refuse.

Fourth, read the clause itself for the phrase “current on all payments.” Some contracts include that as a precondition, and after one bounce it becomes the gate the rep uses to dismiss your request before they open the packet. If your contract has that language, you will hear it on the first call back, which is where the next section starts.

What the rep will say

After the email lands, the rep is going to call. You will hear one of three lines, and each sounds like a ruling that closes the matter. None of them are. They are scripts. Here is what each is doing, and the one sentence that answers it.

“We don’t do reconciliations.” The rep on the phone is not authorized to do reconciliations. That does not change what your contract says. Reply in writing, copied to the legal or compliance address printed in the agreement: “I am formally requesting a reconciliation under section [X] of the agreement, with supporting documentation attached. Please confirm receipt and route this to the appropriate party.”

“You’re in default, that option is gone.” A posture, not a fact. Most contracts do not condition reconciliation on a clean payment history; they require a request and the supporting documents you already attached. Reply, also in writing: “The reconciliation provision in section [X] does not require current status, and I am exercising it as written.”

“Send it to legal.” Take that one literally and same-day. Forward your packet to the legal address printed in the contract yourself, with the rep on CC, so the routing does not depend on whether the rep follows through. As Gerard Celmer, COO of Rise Alliance, told ABF Journal, “Most business owners don’t even know they have a right to reconciliation, and even when they do, the process is often designed to fail.” Routing it yourself is how you stay out of that second category.

A written reply does not buy you cooperation. It buys you the record. If the funder’s next move is a faster ACH retry or a fresh stacking-violation accusation, your timestamps are the exhibits an attorney works backward from later. The phone call is where the funder controls the script. The inbox is where you do. There is a point past which the inbox stops being enough.

When this stops being a reconciliation problem

Sometimes the paper trail does not arrive in time, and the funder moves ahead of you. Five signals mean the email phase is over and litigation has already started.

A UCC notice has gone out to your customers, instructing them to redirect their payments to the funder. A restraining notice was served on your operating bank under CPLR § 5222, which compels the freeze inside one business day, usually before you notice payroll bouncing. A New York summons landed in your inbox under CPLR § 308, the email-service path most MCA funders now use. A confession of judgment is sitting on your county clerk’s docket. Or the funder is alleging a stacking violation, which is a separate breach track that reconciliation does not cure.

Any one of those, and the next move is not another email. Find an MCA-defense attorney and book a consult.

Today.

A one-hour consult runs $400 to $800 in most markets. What that money buys, in one paragraph: a read of your specific contract against the LG Funding factors, a named demand letter that puts the recharacterization argument on record before the funder’s lawyer drafts a complaint, the procedural plan for vacating a confession of judgment if one was filed, a § 5222 traverse if your account is already frozen and a straight answer on whether your numbers justify filing anything at all.

One line on bankruptcy, because the question always comes up. The small-business reorganization track is Subchapter V at 11 U.S.C. § 1182. The debt cap moves; get the current number from the attorney rather than a search result.

Here is what happens when you send the email and the four-document packet from section three: the collections rep gets something they cannot handle alone, and the file routes to underwriting or legal. That routing takes days, sometimes a week. During that window, the funder’s lawyers are sitting on a documented, unanswered reconciliation request. That is the exact fact pattern the Yellowstone complaint labeled unlawful and Carter Ledyard’s analysis calls recharacterization evidence. The funder can still move on you. But now moving costs them something it did not cost them before. Send the email today. The attorney call is the next step, not the first one.