Merchant Cash Advance Agreements and Your Franchise Agreement – Buyer Beware

June 1, 2023by Jeffrey Davis

Entering into a merchant cash advance agreement if you are the owner of a franchise (franchisee) could result in the termination of your franchise. Often the franchise agreement will have a provision that looks something like this: “Principals must not, without our prior written consent, transfer, pledge, and/or otherwise encumber their interest in you.” This means that you cannot do anything that places any liens on the franchise in any way shape or form.

If you’re seeking a merchant cash advance where a company advances money by  “purchasing” your receivables, you are almost certainly in violation of your franchise agreement. As a condition to the cash advance company giving you money, they will file a UCC-1 on all of your assets and receivables which means they have a lien on all of your assets and receivables. Your franchise agreement almost certainly prohibits any liens or “encumbrances” which means that entering into a merchant cash advance agreement could likely mean the termination of your franchise agreement.