Most merchant cash advances are structured to look like a purchase of your future receivables. That’s the whole legal premise. The funder isn’t lending you money – they’re buying a slice of revenue you haven’t earned yet, at a discount. If it’s actually a purchase, usury laws don’t apply, because usury laws cover loans, and a purchase isn’t a loan.
But here’s the thing – a lot of MCAs aren’t really purchases. They’re loans wearing a costume. And when a court figures that out, the entire deal can get recharacterized as a usurious loan, which in New York means criminal usury at 25%+ APR, and the contract can be voided entirely.
Short answer: If your MCA has a fixed daily payment with no real reconciliation, a finite term, an absolute repayment obligation regardless of business performance, and the funder bears no actual risk of your business slowing down, you probably don’t have a purchase. You have a loan. And if the effective APR is over 25%, in New York, that loan is criminally usurious.
Below are the 7 signs courts actually look at. If you see three or more in your contract, you should talk to an attorney before you make another payment.
1. There’s no real reconciliation provision
A true MCA has to let you adjust your daily payment down when revenue drops. That’s the whole basis of calling it a purchase – the funder is buying variable receivables, so the payment has to vary with them.
What you want to look for – is there a reconciliation clause, and if there is, does it actually work? Many MCAs have a reconciliation clause on paper, but in practice, the funder makes it nearly impossible to use. They require 30 days of bank statements, written requests by certified mail, approval at their sole discretion, and they’ll deny it for any reason or no reason at all. Courts have started looking past the language, and asking – did the merchant actually have a real path to reconcile? If the answer is no, the “purchase” looks a lot more like a loan.
2. The payment is fixed, not a true percentage
A real MCA takes a percentage of daily receipts. If you do $10,000 one day and $2,000 the next, the funder gets a percentage of each. The dollar amount changes.
A loan dressed as an MCA – takes a fixed daily ACH. $487 every business day, no matter what. That’s not a purchase of variable receivables. That’s a loan with a payment schedule. Courts notice this immediately. If your daily debit is the same number every single day, that’s a major red flag, and it’s usually the first thing a judge points to when recharacterizing.
3. There’s a finite, predictable term
Purchases of receivables don’t have a term. The funder bought $50,000 of your future revenue, and they collect until they get it – which might take 4 months if business is good, or 14 months if it’s slow. There’s no maturity date.
Loans have a term. If your MCA contract says “estimated term: 9 months” or has a maturity date, or if you can do simple math – purchased amount divided by daily payment, times business days – and get a number that looks like a loan term, you have a loan. Funders who write contracts with implicit terms are essentially admitting the deal is a financing, not a purchase.
4. You’re personally guaranteeing absolute repayment
This is the big one. In a true purchase, the personal guarantee can only cover specific bad acts – fraud, blocking ACH, closing accounts, stacking. The PG can’t guarantee that the receivables will materialize, because that would mean you’re personally on the hook for the funder’s investment risk – which means it’s not their risk anymore, which means it’s not a purchase, it’s a loan.
If your personal guarantee says you guarantee “all amounts due” or “the full repayment of the purchased amount” without limiting it to specific defaults – that’s a loan guarantee. Some MCAs are sloppy enough to write this directly into the contract. Others bury it in a separate document. Either way, it’s one of the cleanest pieces of evidence courts use.
5. The funder bears no real risk of your business slowing down
Ask yourself – what happens to the funder if my business legitimately, honestly slows down 50%? In a true purchase, they collect 50% less per day, and it takes them twice as long to recover their investment. They share in the downside. That’s the risk they took on when they bought the receivables.
In a disguised loan, nothing changes. They still want their $487 per day. If you can’t pay it, you’re in default, they accelerate the balance, they sue you, they hit your PG. The funder has no downside exposure to your actual business performance. Which means they didn’t really buy your receivables – they lent you money against them.
6. The contract has a confession of judgment, default fees, and acceleration clauses that look exactly like a loan
Purchases don’t get accelerated. You can’t “accelerate” the delivery of receivables you already bought. If your MCA contract has – acceleration of the entire balance on default, default interest, late fees, attorney fee provisions written like a promissory note, and (until New York banned them in 2019) a confession of judgment – the contract is functioning as a loan, regardless of what it calls itself.
Courts look at the totality of the document. A “purchase agreement” that operates mechanically like a loan in every meaningful way, is a loan.
7. The effective APR is absurd
This is the one that triggers the usury analysis in the first place. Calculate it – take what you actually received (purchase price minus any origination/underwriting fees), the daily payment, and the realistic term, and run an APR.
Most MCAs come in between 60% and 200% APR when calculated honestly. Some hit 400%+. New York’s criminal usury cap is 25%. Civil usury is 16%. So functionally, every MCA in existence is over the line – if it’s a loan. The only thing keeping them legal is the purchase characterization. Take that away, and the whole industry is making criminally usurious loans.
If your APR is over 25%, and you can check three or more of the boxes above, you have a strong recharacterization argument. That doesn’t mean you win automatically – the funder will fight it, and the law is still developing. But it means you have leverage you didn’t know you had, and the conversation with that funder changes completely.
What to do if you see these signs in your contract
Don’t stop paying yet. The moment you default, you give the funder the initiative – they file, they sue, they freeze accounts. You want to be the one who controls timing.
What you want to do – get the contract reviewed by someone who actually understands MCA recharacterization (not every commercial litigator does), calculate your real APR, document every reconciliation request you’ve made and how the funder responded, and pull together your bank statements showing how the daily payment relates to your actual receipts.
If the recharacterization argument is strong, you have options that don’t exist for a normal MCA – you can negotiate from a much stronger position, you can defend a lawsuit on the merits instead of just trying to settle, and in some cases, you can get the entire balance voided and recover what you’ve already paid.
The funders know which of their contracts are vulnerable. They settle the bad ones quietly, and they hope the merchants never figure it out. Most merchants never do.
