Funders write merchant cash advances as purchases of your future receivables, not loans, which keeps them outside usury limits. Courts don’t always agree. How judges decide which one your contract really is, and why the answer can change your leverage.
The short answer: Legally, a merchant cash advance is usually treated as a purchase of future receivables, not a loan, as long as the funder actually bears the risk that your sales fall. New York courts look at three things: whether the contract has a real reconciliation clause, whether the term is open-ended, and whether the funder can still collect if the business fails or files bankruptcy. If those point toward guaranteed repayment, a court may treat the MCA as a loan, which can open a criminal-usury defense above 25% a year in New York.
If a merchant cash advance is a loan, usury laws can apply. In New York, where most MCA contracts choose their governing law, charging a business more than 25% a year is criminal usury, and an agreement found to be criminally usurious can be unenforceable. If it’s a purchase of receivables, usury law generally doesn’t apply at all, which is why funders structure them that way. With effective rates that often run well above 100% a year (see our MCA APR table), the classification can decide whether a funder can collect anything.
New York courts ask a simple question: is the funder’s repayment truly contingent on the business’s sales, or is repayment effectively guaranteed? In LG Funding, LLC v. United Senior Properties of Olathe, LLC (2d Dep’t 2020), the Appellate Division said courts usually weigh three factors.
A true sale ties your payments to a percentage of actual receipts. If your sales fall, a genuine reconciliation clause lets you get your payments adjusted down. If reconciliation is left to the funder’s “sole discretion,” or the procedure is so burdensome it’s illusory, that points toward a loan.
A loan has a fixed repayment period. A purchase of receivables runs until the purchased amount is collected, however long that takes. A contract that requires the full amount within a set number of months, regardless of sales, looks more like a loan.
In a true sale, the funder takes the risk that the business closes or files bankruptcy and the receivables never come in. If the contract makes bankruptcy a default and lets the funder collect anyway through a personal guarantee or confession of judgment, the funder isn’t really bearing that risk.
The takeaway: there’s no blanket rule. Each contract is judged on its own terms, so the specific language in yours is what matters.
In New York, a corporation generally can’t use civil usury as a defense, but it can raise criminal usury (rates above 25% a year) as a defense to collection. Rules differ in other states and depend on the contract’s choice-of-law clause. This is a question for an attorney who handles MCA litigation.
Most MCA disputes never reach a judge. But a contract with weak reconciliation, a fixed term and full recourse gives you and your attorney real leverage in a negotiation, because the funder knows a court might not enforce it as written. A contract that clearly passes the test means your leverage comes from elsewhere: your cash flow, the funder’s collection costs and timing. Either way, you want to know which kind you have before you negotiate. Start with how to evaluate an MCA stack and the contract clauses that matter most.
Is a merchant cash advance legally a loan?
Usually not. Most MCAs are written and enforced as purchases of future receivables. Courts may treat one as a loan if repayment is effectively guaranteed, for example with no real reconciliation, a fixed term and full recourse if the business fails.
What are the three factors New York courts use?
Whether there is a genuine reconciliation provision, whether the agreement has a finite term, and whether the funder has recourse if the merchant goes bankrupt.
Can I use usury to get out of an MCA?
Possibly, if a court finds the agreement is really a loan. In New York, businesses can raise criminal usury (over 25% a year) as a defense. It depends on your specific contract and needs an attorney.
Does reconciliation matter if I never asked for it?
It can. Courts look at whether the reconciliation right is real and usable, not only whether you used it. A discretionary or illusory clause points toward a loan.
This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Renaissance Capital Advisors provides business consulting services and is not a law firm. Talk to a licensed attorney about your specific contract and any legal deadline.
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