Merchant cash advances can appear to offer a quick solution when a small business needs working capital. A funding company provides cash upfront, then collects a fixed amount or percentage of the business’s future receivables, frequently through daily or weekly withdrawals.
Problems arise when high withdrawals, aggressive default provisions, and added fees make the obligation difficult to manage. Before New Jersey changed its law, some financing agreements also included a confession of judgment, a powerful enforcement device that could leave a business owner facing a judgment before having a meaningful opportunity to present a defense.
What Is a Confession of Judgment?
A confession of judgment is a contract provision through which a business accepts liability in advance. If the funder later claims that the business defaulted, the provision can allow it to obtain a judgment without first proceeding through an ordinary lawsuit.
That process can move quickly. A business might discover the judgment only after its bank account is restrained or collection efforts begin. At that point, disputing the claimed default or amount owed becomes considerably more difficult.
Under N.J.S.A. 2A:16-9.1, a business-financing provider cannot extend financing to a New Jersey business under an agreement containing a confession of judgment. The protection applies broadly to business loans, lines of credit, cash advances, factoring arrangements, and asset-based transactions. A prohibited confession-of-judgment provision is invalid and unenforceable against the business.
The law covers many types of for-profit enterprises, including sole proprietorships, partnerships, corporations, professional entities, joint ventures, associations, and cooperatives.
What the Ban Changes for MCA Enforcement
The ban prevents a merchant cash advance provider from using a prohibited contract clause to bypass the usual court process. If the funder alleges a breach, it generally must pursue an authorized remedy that gives the business notice and an opportunity to respond.
That distinction matters. In an ordinary lawsuit, the business can examine the funder’s calculations, dispute whether a default occurred, raise applicable contract defenses, and challenge provisions that are unlawful or unenforceable. The funder does not receive a judgment solely because the business signed away its right to contest liability in advance.
The New Jersey Attorney General can investigate violations and bring a civil enforcement action. A violator can face a penalty of up to $5,000 for a first violation, $10,000 for a second, and $15,000 for each subsequent violation.
The Ban Does Not Cancel the Underlying Agreement
An invalid confession-of-judgment clause does not necessarily erase the entire merchant cash advance agreement or eliminate an otherwise valid payment obligation. A funder can still file a conventional breach-of-contract lawsuit or pursue other remedies permitted by the agreement and applicable law.
The agreement may also contain personal guaranties, arbitration requirements, ACH authorizations, or security interests perfected through Uniform Commercial Code filings. Whether and how those provisions can be enforced depends on the contract, the transaction’s structure, and the surrounding facts.
Choice-of-law and forum-selection clauses can create additional complications, especially when the funder is located outside New Jersey or obtained a judgment in another state. Those provisions do not necessarily make a prohibited confession of judgment enforceable, but challenging an out-of-state judgment can require prompt legal action.
Warning Signs in a Merchant Cash Advance Agreement
Before signing an MCA contract, business owners should look closely at:
- Daily or weekly withdrawal amounts
- Reconciliation rights based on actual receivables
- Personal guaranties
- Broad definitions of default
- Additional fees triggered by missed payments
- ACH authorization provisions
- UCC liens covering business assets
- Arbitration, venue, and governing-law clauses
The agreement’s label is not always controlling. Depending on its terms and how it operates in practice, a transaction described as a purchase of receivables could raise questions about whether it functions more like a loan.
Respond Quickly to an MCA Dispute
Business owners facing an MCA lawsuit, bank restraint, or default notice should preserve the financing agreement, payment records, bank statements, reconciliation requests, and communications with the funder. Court papers and collection notices should never be ignored because response deadlines can be short.
ClearPath Law represents New Jersey individuals and businesses facing serious debt and financial disputes. Attorney David Stevens can review the agreement, explain your options, and help you determine a practical path forward. Contact ClearPath Law to schedule a confidential conversation.
