What is a confession of judgment in a business loan?

A confession of judgment (COJ) is a clause that allows a funder to enter a legal judgment against you without serving legal notice, giving you an opportunity to respond, or holding a hearing. It lets funders freeze accounts and pursue collections with minimal process. New York banned COJs in business funding agreements in 2019, but they still appear in agreements from funders in other jurisdictions. Always ask whether a funding agreement contains one before signing.

What are the biggest red flags in a merchant cash advance agreement?

The most serious red flags are a confession of judgment clause, verbal promises that aren't in the written agreement (especially prepayment discounts or conversion promises), no stated prepayment discount or terms that are silent on early payoff, pressure to sign without adequate time to review, and blanket UCC filings without a clear process for termination after payoff.

What should I ask before signing a business funding agreement?

Ask whether the agreement contains a confession of judgment. Ask whether there is a prepayment discount and request it in writing. Ask what type of UCC filing will be made and what the release process is after payoff. Ask whether every verbally promised term is reflected in the written document. Read the actual agreement — not just a summary — before signing anything.

Is it true that a merchant cash advance can help me qualify for SBA later?

No. An active MCA position is disqualifying for SBA — the payments reduce your DSCR and multiple UCC filings raise flags for SBA underwriters. SBA proceeds also cannot be used to retire advance positions. Anyone who tells you to take an MCA now to 'prepare' for SBA is either mistaken or steering you toward a higher-commission product. The path to SBA runs through clean banking and resolved positions.

What is a prepayment discount on an MCA and why does it matter?

A prepayment discount means that if you pay off the advance ahead of schedule, the total amount owed is reduced. Most reputable funders offer this. It should be in writing — either in the agreement or in a signed addendum — before you fund. If an agreement is silent on prepayment, assume no discount exists. This is one of the most important terms in a working capital deal and is worth confirming explicitly.

Red Flags Every Business Owner Should Know Before Signing a Funding Agreement

Most business owners who get burned by a funding agreement don't realize it until after they've signed. The terms that cause problems were disclosed — just not highlighted. Here's what to look for before you agree to anything.

Confession of Judgment

The most important one. A confession of judgment (COJ) means you agree in advance that if you default, the funder can enter a court judgment against you without notice, without a hearing, and without giving you a chance to respond. In states where COJs are enforceable, a funder can freeze your bank account within days of a claimed default — before you even know it's happening. New York banned COJs in 2019, but they still appear in agreements from funders in other jurisdictions. Ask directly before signing. A reputable funder doesn't need one.

Promises That Aren't in the Document

Verbal commitments have no legal weight and aren't binding on the funder. If a term was promised — a prepayment discount, weekly payment conversion, anything — it needs to be in the agreement or a signed written addendum. If the person you're working with won't put it in writing, treat it as if it doesn't exist. Because legally, it doesn't.

Scripts That Should Raise Immediate Questions

Some of the most common misleading lines in this industry sound reasonable on the surface:

"This is a line of credit." It's almost certainly not. A true LOC lets you draw, repay, and draw again without reapplying. Ask: can I draw again after repaying without a new approval? If the answer is no or vague, it's not a LOC.
"Take this to activate your line of credit." There's no mechanism for this. An advance doesn't unlock anything. Any future product requires full requalification based on your credit, banking history, and track record at that time.
"Take this now and we'll get you into SBA right after." An active advance position is disqualifying for SBA. This is not a path to SBA — it's the opposite.
"This builds your business credit." Most MCA funders don't report to business credit bureaus. An advance does not build your credit profile. Tradelines, secured cards, and products that actually report do.
"You're guaranteed to qualify for more next time." No guarantees exist in this space. Every renewal requires requalification. A strong track record helps — it doesn't guarantee anything.
"Just build a relationship and we'll take care of you." Relationships don't override underwriting. The next decision will be based on what your file looks like at that time, not on loyalty.

The SBA Bait-and-Switch

A lender positions themselves as an SBA resource, gathers your documents, then returns with a working capital offer — because they lack SBA access, your file doesn't qualify, or the commission is higher. You've taken a hard credit pull for a product you weren't shopping for. The variation "take this MCA and we'll get you SBA right after" is equally false — an active advance is disqualifying for SBA, full stop.

Missing Prepayment Terms

Most reputable funders offer a prepayment discount if you pay off early. It should be in writing — the discount schedule, how to invoke it, any conditions. If the agreement is silent on prepayment, assume no discount exists. Get it in writing before you fund.

Pressure to Sign Before You've Read It

"Approval expires today." "Rate locks at end of day." Real urgency exists in funding — but artificial urgency designed to stop you from reading what you're signing is a tactic. Slow down. Get answers in writing. If the deal disappears because you took 24 hours to read it, it wasn't legitimate.

How to Find People Worth Working With

Reputable operators do exist in this industry. They present total cost clearly, don't use COJs, put prepayment terms in writing, and will tell you when a product isn't the right fit — even when that costs them a commission. The practical difference between a trustworthy source and a problematic one often comes down to whether someone has vetted them before you ever get on the phone. A platform that reviews how partners handle cost disclosure, prepayment, and product steering gives you a layer of protection before the conversation starts. The checklist below still applies regardless of how you found the deal.

What to Do Before You Sign Anything

Ask: is there a confession of judgment in this agreement?
Ask: is there a prepayment discount — and can you send the addendum?
Ask: what UCC filing will be made, and what's the release process after payoff?
Ask: is everything discussed verbally reflected in the written agreement?
Read the actual document before you sign. Not a summary — the document.

The questions that feel awkward to ask are usually the most important ones. Anyone who responds with defensiveness or pressure is giving you useful information.