Is a Merchant Cash Advance a Loan? Why the Label Changes Your Rights

Why does it matter whether a merchant cash advance is a loan?

Because almost every protection a borrower has depends on there being a loan. Usury laws cap the interest a lender can charge, but they only apply to loans. If an MCA is a genuine purchase of receivables, there is no interest and so no usury, however expensive the deal is. New York courts put it bluntly: where there is no loan, there can be no usury.

The stakes are highest in New York, where many funders choose to sue. Corporations and LLCs generally cannot use New York's civil usury limit, but they can raise criminal usury as a defense under General Obligations Law § 5-521(3), which points to the 25% annual rate in Penal Law § 190.40. In Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021), the Court of Appeals held that a loan found to be criminally usurious is void from the start, meaning the lender cannot collect principal or interest. An MCA that works out to an estimated APR of 100% or more is far above 25%, so whether it is a loan can decide whether the funder collects anything at all.

The label also affects which disclosure rules apply. Federal Truth in Lending rules do not cover credit "primarily for business, commercial, or agricultural purposes" (15 U.S.C. § 1603(1)), so neither an MCA nor a business loan gets a federal APR disclosure. Your protection on cost comes from the handful of states with commercial financing disclosure laws, and from reading the contract yourself.

How do courts decide if an MCA is a loan?

The leading New York decision is LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep't 2020). The court said the key question is whether the funder is entitled to repayment absolutely, and it looked at three factors to answer it. Later decisions in New York state and federal courts apply the same framework.

• Reconciliation: does the agreement genuinely adjust your payments to match actual sales? A clause saying the funder "may" adjust, at its discretion, points toward a loan; a clause saying payments "shall" be adjusted points toward a sale.
• Finite term: does the agreement have a fixed end date or a fixed payment schedule that ignores your sales? A set term looks like a loan; an open-ended term that depends on sales looks like a purchase.
• Recourse on bankruptcy: if the business fails or files for bankruptcy, can the funder still collect in full, for example by treating bankruptcy as a default or calling the owner's guaranty? If so, the funder bears little real risk, which points toward a loan.

Which contract terms make an MCA look like a loan?

The three factors are a starting point, not a checklist that settles the case. Courts read the whole agreement, and certain terms push the analysis toward "loan" because they shift the risk of slow sales from the funder back to you.

Watch for a reconciliation clause that is left to the funder's "sole discretion" or buried under document demands that make it practically unusable. Watch for events of default that include a drop in sales, closing the business, or filing for bankruptcy, because those make the whole balance due when the business does exactly what a true purchase of receivables is supposed to risk. Watch for a personal guaranty that covers ordinary nonpayment rather than just fraud or diversion of receivables, and for a confession of judgment that lets the funder enter judgment for the full amount. A fixed daily payment that never changes, combined with an estimated repayment period stated as a hard deadline, also looks more like a loan.

In Fleetwood Services, LLC v. Richmond Capital Group LLC, a 2023 summary order, the federal Second Circuit affirmed a judgment that treated an MCA as a usurious loan, pointing to adjustment rights left to the funder's sole discretion and recourse against guarantors if the merchant went bankrupt. A summary order is not binding precedent, but it shows how much those two clauses can matter.

Which terms make it look like a true sale of receivables?

The opposite terms tend to support the funder's position. A reconciliation clause that requires the funder to adjust payments within a fixed number of business days after you send bank statements, with no discretion to refuse, is the strongest single sign of a true sale. So is an agreement with no fixed term: the funder simply collects its agreed percentage of sales until the purchased amount is delivered, however long that takes.

Other supportive terms: a statement that the funder bears the risk of nonpayment if sales decline in the ordinary course of business, a guaranty limited to fraud, diversion of receivables and deliberate breaches, and a default list that does not include bankruptcy or a mere decline in revenue. If your agreement reads this way, a court is more likely to enforce it as written, which also means the factor rate stands even if it is high. That is not necessarily bad for you: a true sale means slow sales should actually reduce your payments.

Are merchant cash advances legal?

Yes. Merchant cash advances are legal in every state, and no federal law bans them. What is illegal is specific conduct: misrepresenting the terms, collecting more than the contract allows, using unlawful collection tactics, or dressing a loan up as a sale to charge rates the law forbids. Regulators have gone after that conduct directly. In January 2025 the New York Attorney General announced a $1.065 billion judgment against Yellowstone Capital and related companies, alleging their advances were really high-interest loans with fixed payments, and the FTC has obtained industry bans against operators of RCG Advances over deceptive terms and abusive collection.

States are also adding rules. As of 2026, about a dozen states have commercial financing disclosure laws that require cost figures on many MCA offers, and California and New York require an APR or estimated APR. Virginia bars confessions of judgment in sales-based financing, and Texas, under Finance Code chapter 398 effective September 1, 2025, voids them in commercial sales-based financing and restricts automatic debits unless the funder holds a first-priority security interest. None of these laws cap the price, but they change what a funder can put in the contract.

Loan or advance: how the label changes your rights

The table below summarizes what usually follows from each label. The details depend on your state and on the court that hears the dispute.

What should you check in your own agreement?

You do not need to decide the legal question yourself, but you can see which way your contract leans in a few minutes. Our free Merchant Cash Advance Review Checklist walks through these points with the offer in front of you.

• Find the reconciliation clause. Does it say "shall" or "may"? Is there a deadline for the funder to act, and how often can you ask?
• Look for any fixed term, maturity date or "estimated" payoff date that the contract treats as binding.
• Read the events of default. Is bankruptcy, closing the business or a fall in revenue on the list?
• Read the guaranty. Does it cover only fraud and breach of your promises, or does it cover the whole balance whenever the business stops paying?
• Check for a confession of judgment, in the main agreement or in the guaranty, and whether your state restricts it.
• Work out the estimated APR from what you actually receive, the payment amount and how often it is taken.

What if you think your MCA is really a loan?

Do not stop paying on that theory alone. A usury defense is raised in court, usually after the funder sues or enters a judgment, and the outcome turns on the exact wording and the court's view of it. Stopping payments, changing bank accounts or blocking debits is usually an event of default that makes the full balance due and can trigger the guaranty, so take advice first.

A commercial litigation lawyer who handles MCA disputes can read the agreement against current case law in the state named in the forum clause, and tell you whether a usury defense, a challenge to a confession of judgment or a negotiated settlement is realistic. Bring the agreement, the guaranty, any renewal paperwork and your bank statements showing every debit. The Business Financing analyzer reads the reconciliation, default, guaranty and confession of judgment clauses for you, and estimates the APR from the actual payment schedule, so you know which terms to raise when you make that call.