Some business financing agreements include a clause called a confession of judgment, or COJ. It’s not something most business owners encounter in everyday life, and the language can be easy to skim past in a long contract. But a confession of judgment can have serious consequences if a payment dispute ever arises, so it’s worth understanding exactly what you’d be agreeing to before you sign.
What a Confession of Judgment Actually Is
A confession of judgment is a clause in which the borrower agrees in advance to let the lender obtain a court judgment against them without a standard court hearing, typically in the event of a missed payment or default. In practice, it allows the funding source to go straight to enforcement – such as freezing bank accounts or placing liens on assets – without the borrower first having the opportunity to present a defense in court. It effectively waives certain due process protections a borrower would otherwise have.
Why Some Funding Agreements Include It
COJ clauses have historically appeared more often in certain short-term, revenue-based financing products, particularly some merchant cash advance agreements, as a way for the funding source to reduce collection risk and speed. From the lender’s perspective, it removes uncertainty and delay if a business stops paying. From the borrower’s perspective, it removes a layer of legal protection that would otherwise exist if a genuine dispute arose – for example, if a business believed it had already satisfied its obligation or that a payment was miscalculated.
What to Watch For Before Signing
Not every financing agreement includes a COJ, and its use has become more regulated in a number of states in recent years, with some states restricting or banning COJ clauses in commercial financing altogether. Before signing anything, it’s worth confirming whether the agreement contains this clause, what specifically triggers it, and whether your state places any restrictions on its enforceability. If a COJ is present, it’s reasonable to ask the funding source to explain exactly what circumstances would activate it and what the process would look like.
How This Fits Into a Broader Comparison
A confession of judgment clause is one of several contract terms – alongside factor rates, personal guarantees, and UCC liens – that can meaningfully change the real risk profile of an offer, even when two offers look similar on the surface in terms of amount and payment size. This is one reason it rarely makes sense to evaluate a single offer in isolation. Comparing structures across products like a working capital loan, a business line of credit, or an SBA loan gives a business owner a clearer sense of which terms are standard for a given product type and which are specific to one offer.
Questions Worth Asking Before You Sign
If a confession of judgment clause is part of an agreement, it’s reasonable to ask what specific event triggers it, whether it’s enforceable in your state, and what recourse you’d have if you believed a default was declared in error. A funding source that can’t or won’t answer these questions clearly is worth a second look before moving forward.
Frequently Asked Questions
Is a confession of judgment clause legal in every state?
No. A number of states have restricted or banned the use of confession of judgment clauses in commercial financing agreements. Whether one is enforceable depends on the state where the business or the agreement is based.
What triggers a confession of judgment clause?
This depends on the specific agreement, but it’s typically tied to a missed payment or a declared default. The exact trigger language should be clearly spelled out in the contract itself.
Can I negotiate a financing agreement to remove a confession of judgment clause?
It’s worth asking. Not all funding sources are willing to remove the clause, but terms can vary between offers, which is why comparing more than one option before signing is generally a good idea.
Before you sign anything, it’s worth seeing what other funding structures you might qualify for. Apply now to compare options side by side.