The reconciliation clause: the paragraph most advance holders never read

Somewhere in the agreement you signed, usually between the definition of the estimated daily amount and the events of default, there is a paragraph that gives you the right to have your payment recalculated when your revenue falls.

Most owners have never read it. Some funders do not volunteer it. It is the single most useful provision in a typical merchant cash advance contract, and using it does not require anyone's goodwill.

Why the clause is in there at all

The reconciliation provision is not a courtesy the industry invented for customers. It is structural.

An advance is written as a purchase of a percentage of your future receivables, not as a loan. That characterization is what keeps the transaction outside state usury limits, and it depends on the funder's recovery genuinely varying with your sales. A fixed daily debit that never moves regardless of revenue looks a great deal like a loan payment.

The reconciliation clause is what preserves the variability. It says the fixed debit is only an estimate of the agreed percentage, and that the estimate gets trued up against what you actually collected.

Courts pay attention to it. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (N.Y. App. Div. 2d Dep't 2020), New York's Second Department set out the factors used to decide whether an advance should be recharacterized as a loan, and the presence of a reconciliation provision is among them, along with whether the agreement has a finite term and whether the funder has recourse if the business fails through no fault of its own. Regulators have looked at the same conduct: the Federal Trade Commission sued RCG Advances in the Southern District of New York in 2020 over its handling of merchant advances, resolving the matter by settlement in 2022, and the New York Attorney General brought its own action against Richmond Capital Group and related entities that same year.

The practical takeaway for you is simple. The clause exists because the funder needs it to exist. That is leverage.

What the clause typically says

Wording varies, but the standard construction has four parts.

It states the specified percentage of receipts the funder purchased, often somewhere between 8 and 25 percent.

It states the estimated fixed debit, calculated from the revenue figures in your application.

It acknowledges the debit is an estimate only, because daily receipts vary.

It provides a mechanism to correct the estimate, either automatically at a stated interval or on your request within a stated period, by refunding or crediting the excess and adjusting the going forward amount.

That fourth part is where contracts diverge, and it is the part to read twice.

The two versions, and which one you have

Automatic reconciliation. The funder recalculates on its own each month against your deposits. Rare, and the ones that promise it do not always perform it.

Reconciliation on request. Far more common. You must ask, usually in writing, often within a defined window such as five business days after the end of the month, and often to a specific address or email named in the notices section. Miss the window or the address and the funder can decline on procedure alone.

There is a third variety worth flagging. Some agreements say reconciliation will be considered at the funder's sole discretion. That language is exactly what invites a court to ask whether the arrangement is a purchase or a loan, and it is worth noting if you have it.

How to invoke it, step by step

Find the paragraph and the window

Open the PDF and search for reconciliation, true-up, adjustment and specified percentage. Write down three things: the percentage purchased, the deadline for requesting, and the exact notice method and address required.

Send the request the way the contract says

If it requires email to a named address, use that address. If it requires certified mail, send certified mail and keep the receipt. If it names both, do both. Reference the agreement by date and number, quote the section, and state plainly that you are requesting reconciliation for a named period.

Send the documents with it

Do not wait to be asked. Attach the file complete, so the request cannot stall on a missing page.

Follow up in writing on a schedule

Seven business days, then again at fourteen, each time by reply to your original message so the thread stays intact. Never conduct this over the phone alone. If you do speak to someone, send a short email afterward confirming what was said.

What funders ask for

Expect all of these, and prepare them before you send:

• Complete business bank statements for the reconciliation period, every page, including the pages with nothing on them
• Card processor and ACH settlement reports covering the same dates
• A monthly gross receipts summary showing the total the percentage should be applied to
• A profit and loss statement, and sometimes a year to date comparison
• A signed certification that the figures are accurate, which some funders require

One definitional point causes most disputes: what counts as receipts. Some contracts base the percentage on card volume only, others on all gross receipts including checks, cash and ACH deposits. Transfers between your own accounts, refunds and chargebacks are usually excluded. Read the definition and calculate on the funder's definition, not yours, or the request comes back over arithmetic rather than substance.

What the adjustment looks like in dollars

A hypothetical salon, Fifth and Vine, signed an advance with a specified percentage of 15 percent of gross receipts. The application showed $200,000 in monthly receipts, so across 21 business days the estimated daily amount was set at $1,428.

In September, actual gross receipts came in at $124,000. Fifteen percent of that, spread across the same 21 days, is $886 a day.

The difference is about $543 a day, or $11,400 for the month. Under a contract with a functioning reconciliation provision, that overage is refunded or credited, and the going forward debit is reset to the corrected figure until receipts recover.

That is not a discount and it is not relief. It is the contract being performed as written.

When the funder ignores you

It happens. Here is what to do and what it means.

Keep the paper. Every request, every delivery confirmation, every unanswered follow up, in one folder with dates. Silence in response to a properly delivered contractual request is a fact, and facts are what any later conversation turns on.

Do not stop the debits on your own. Reversing ACH authorization or closing the account is treated as an event of default in nearly every advance agreement, and it converts a documented dispute into an acceleration. If cash flow forces a change to your banking, get advice before you make it, not after.

Understand what the refusal signals. A funder that will not reconcile is declining to honor the term that makes its own contract a purchase rather than a loan. Under the LG Funding factors, that pattern is relevant to how the agreement is characterized, and it matters in negotiation as well as in litigation. Where recharacterization is genuinely at issue, that is an argument for a licensed attorney in your state to evaluate on the facts of your contract.

If several contracts are involved and the requests are going nowhere, this is the point where owners bring in outside help, because the work becomes reading four sets of notice provisions and running four sets of receipts. A review of what your advance agreements actually allow is usually the first thing anyone competent does with the file.

Start here

Find your agreement, find the reconciliation paragraph, and read it today. Then pull six months of bank statements and calculate what the specified percentage would actually be on your real receipts.

If that number is meaningfully below what is leaving your account, you have a written request to send, and it costs you nothing but an afternoon.