Welcome to Delancey Street. If you’re reading this, you’re probably being sued by an MCA funder, or you’re a business owner trying to figure out if you have a defense before things get worse. The “true loan” defense is the single most powerful argument in MCA litigation. But it’s also misunderstood, by most attorneys who don’t specialize in this area.
Short answer: An MCA is supposed to be a purchase of future receivables, not a loan. If your attorney can prove the agreement is actually a disguised loan, then it’s subject to state usury laws — and almost every MCA on the market today violates those laws by a wide margin. Effective APRs of 80%, 150%, even 300% are common. Civil usury caps in most states are 16-25%. Criminal usury caps in NY are 25%. If the court rules your MCA is a loan, the funder can lose the right to collect, and in some cases, you can recover what you’ve already paid.
Courts look at six elements, when deciding whether an mca is a true purchase or a disguised loan. Here they are.
1. Is there a reconciliation provision (and is it mandatory)?
This is the biggest factor. A real MCA has a reconciliation clause that lets you adjust your daily payment based on your actual revenue. If your sales drop, your payment drops. The funder bears the risk of your business performance, which is what makes it a purchase and not a loan.
Most MCA agreements technically include a reconciliation provision. But here’s the trick: it’s almost always discretionary, not mandatory. The lender has the “sole discretion” to grant reconciliation, and they almost never do. Courts (especially in NY) have started seeing through this. A discretionary reconciliation is not a real reconciliation, and judges are increasingly treating it as evidence the deal is a loan.
2. Does the agreement have a finite term?
A true purchase of receivables doesn’t have a maturity date. The funder gets paid as you collect receivables, however long that takes. If the agreement has a hard end date — 6 months, 12 months, whatever — that looks like a loan. Loans have terms. Purchases of contingent receivables don’t.
Most MCA agreements try to get around this by saying there’s no specific term, but then they include language about the “expected” repayment period, daily payment amounts, and a calculated payoff date. Courts have not been fooled by this in recent rulings.
3. What happens if you go bankrupt?
This one is huge. If the agreement allows the funder to collect from you, even if your business goes bankrupt or stops generating revenue, then the funder is not bearing any real risk. Which means it’s not a purchase, it’s a loan.
Look at your agreement. Does it say the funder can pursue the personal guarantor even in bankruptcy? Does it say bankruptcy itself is a “default” that triggers acceleration? If yes, then the funder has structured the deal so they get paid no matter what. That’s lending behavior, not purchasing behavior. A true buyer of receivables accepts the risk that the receivables won’t materialize. A real lender doesn’t.
4. How broad is the personal guarantee?
Personal guarantees in mca’s are not, by themselves, illegal. But the scope matters, a lot. A narrow PG that only kicks in for breach of contract or fraud (you closed the bank account, you stacked, you lied on the application) is consistent with a purchase of receivables.
A broad PG that makes you personally liable for the full balance, regardless of why the receivables didn’t come in, is loan behavior. If the PG essentially makes you the backstop for business performance, the court is going to view the deal as a loan. The funder offloaded the risk onto you, the personal guarantor, which means they were never really buying the receivables at all.
5. Fixed daily payment vs. true percentage of receivables
The original MCA model was a real percentage of credit card receipts — 8%, 12%, 15% of what came in. If sales were slow that day, the payment was smaller. The funder rose and fell with your business.
Almost no funder operates that way anymore. Today the daily ACH is a fixed dollar amount, calculated based on a “good faith estimate” of your average daily revenue. That’s not a percentage of receivables. That’s a loan with a daily payment schedule. Courts are catching on, and the more rigid the payment structure, the more it looks like a loan.
6. Does the funder have an “absolute right to repayment”?
This is the master question, that all the other factors point to. Does the funder get paid no matter what? Can they recover the full amount, regardless of whether your business performs?
If yes — it’s a loan. Full stop. A true purchase of future receivables means the funder is taking on the risk that the receivables might not exist. If the contract is structured so the funder always gets paid — through personal guarantees, acceleration on default, broad UCC enforcement, confession of judgment, and so on — then there’s no real risk transfer, and the “purchase” framing is a fiction the court can pierce.
How do courts actually apply these factors?
No single factor wins or loses the case. Courts (especially in NY, which is where most MCA litigation happens because of choice-of-venue clauses) look at the totality of the circumstances. The leading case is LG Funding LLC v. United Senior Properties, which established a 3-factor test. But more recent cases — Haymount Urgent Care v. GoFund Advance, Fleetwood Services v. Ram Capital — have expanded the analysis into something closer to the 6-factor framework above.
The trend over the last 3-4 years is clear: courts are getting more willing to recharacterize MCA’s as loans. And it’s the funder’s own contract language — especially the discretionary reconciliation and the broad personal guarantee — that’s killing them.
Bottom line
If you’re being sued by an MCA funder, or you’re considering defaulting, the true loan defense is the first thing your attorney should be looking at. Not every case wins on it. But every case should be analyzed for it. And if your funder is one of the more aggressive shops, with a contract full of “sole discretion” language, broad personal guarantees, and acceleration clauses that trigger on basically anything — you have more leverage than you think.
