[Cfairbank]

Tony,

If what you are providing for your client is an MCA, in other words a purchase of future receivables, then you need to understand that the COJ comes into play if the merchant defaults. The term default does not mean that the merchant is no longer able to make payments due to some unforeseen circumstance (lets say a hurricane destroys his business). A default would be something like the merchant committing fraud, or doing something deliberate that prevents the funder from collecting the rightfully purchased revenue. If this is an MCA product and not a loan, and your client does not have any intent of doing something deliberate to prevent the company from collecting what they legally purchased, then he/she should not have any issues signing the COJ.

This may be a good opportunity for you, and others on here, to fully understand the difference between an MCA and a loan. In an MCA transaction, the obligation of the merchant is conditional insofar as the future revenue that he sold for a discount actually comes to fruition. If the future revenue that he sold for a discount today to the funder fails to materialize due to some event out of his/her direct control, then he/she is not in default and the funder assumes all the risk. If the merchant commits fraud or deliberately does something (see the contract) to meet to terms of default (e.g. switch bank accounts without telling the funder, or starts depositing money into a different account, or putting a stop payment, etc...)then he/she is on the hook and hence where the COJ comes into play.

A loan on the other hand, is an unconditional promise to pay, regardless of whether the business is doing well or not. With a loan, the condition to pay on the merchants behalf has nothing to do of whether the business is doing well or not.

I hope this helps you understand the difference and also understand the point and intent of the COJ, and parts of the industry in general.

Alex -- that is great (and correct) legal background on difference between loans and cash advances. However, in the high risk space (really the only place you see full COJs up front), advances really are a lot closer to loans than advances (ever tried to get a true up on an ACH contract with one of those firms?). Two clear reasons I'd recommend brokers advise any client NOT to sign one -- and I'll even put the ethics of the practice and the fact the are unenforceable in many jurisdictions (and therefore just a scare tactic) aside for a moment.

1. You are right, cash advance should only be about contractual performance, not business performance -- however, if you read the "default" clauses of the YSCs of the space (the companies that are actually doing full COJs up front), it is so broad that PG of performance is effectively a PG -- for example, 2 missed payments and now you are "in default" and the PG of performance becomes a true PG -- and the full amount is due regardless of business performance, and they can try to enforce the COJ.
2. As Michael I said, the COJ is a clear intent to circumvent the first position who will usually have a UCC on the business and the first "right" to those receivables. I'm not convinced it should even be legal (even putting the ethics of a full COJ up front and the legality of stacking aside) to sign a second+ position COJ because they don't have the first right to those receivables.