Independent since 2015
How to read a merchant cash advance term sheet before you sign
A term sheet is built to look simple. It usually is not. Here is what each line actually means, and which ones to slow down on.
Most merchant cash advance term sheets fit on a single page: an advance amount, a factor rate, a payment amount, and a frequency. That brevity is the point. A one-page term sheet reads faster than it should, and the fields that matter most, like the true annualized cost, are not on it at all. You have to calculate that yourself, or use a tool like our factor rate calculator to see it before you sign.
Advance amount and factor rate
The advance amount is what lands in your account. The factor rate, typically between 1.1 and 1.5, is multiplied against the advance to set your total repayment. A $50,000 advance at a 1.40 factor rate means you owe $70,000 back, full stop, regardless of how quickly or slowly you repay it. The factor rate is not an interest rate, and lenders are not required to convert it to one for you. See our full breakdown of how the math actually works.
Holdback percentage
This is the share of your daily card or bank receipts the lender collects, often 10 to 20 percent. A higher holdback repays the advance faster but takes a bigger bite out of your daily cash flow. Ask what happens to the holdback percentage on a slow month, since some agreements let it float with revenue and others keep it fixed regardless.
Reconciliation clause
If your agreement is structured as a true percentage-of-receivables holdback rather than a fixed daily amount, you may have a right to request reconciliation: a true-up where a slow month’s overpayment gets refunded, or a strong month’s underpayment gets collected. Many advances do not offer this, and remittances are fixed dollar amounts regardless of revenue. Know which structure you signed before you assume you have this protection.
Confession of judgment
Older agreements, and some agreements still written today, include a confession of judgment: a clause letting the lender obtain a judgment against you without a hearing if they claim you defaulted. New York restricted their use against out-of-state signers in 2019. If you are a New York business signing with a New York lender, that reform may not apply to you at all. Read our full guide on confessions of judgment in New York before you sign anything with this clause.
Stacking language
Some agreements explicitly prohibit taking a second advance while the first is outstanding, and some lenders will flag your account or accelerate repayment if they detect a second lender collecting from the same receivables. If you think you might need additional capital soon, ask about this before you sign the first advance, not after.
The one number that is never on the page
No term sheet we have seen states the annualized cost outright. Put the advance amount, factor rate, and repayment term into our calculator before you sign anything, and compare it against what a term loan or line of credit would cost for the same amount. The gap is usually bigger than the factor rate suggests.
