MCA Debt Relief Options in California

California has more small businesses carrying MCA debt than any other state. It also has more legal tools to challenge that debt than most business owners realize.

The merchant cash advance industry targets California businesses aggressively because the market is large, the industries are capital-intensive, and the demand for fast funding is constant. Restaurants, contractors, retailers, trucking companies, medical practices, and service businesses across the state have signed MCA agreements under financial pressure and are now managing daily withdrawals that consume the cash flow the advance was supposed to support.

California’s legal framework offers several avenues for relief that are not available in every state. The combination of state lending laws, consumer protection statutes, and disclosure requirements creates a legal environment that is more favorable to MCA borrowers than the national average.

The Legal Landscape in California

California enacted SB 1235 in 2018, which requires commercial financing providers, including MCA companies, to disclose the total cost of the financing, the total amount of payments, the term, the payment amounts, and the annualized rate. The disclosure must be provided before the business owner signs the agreement. The law was implemented through regulations adopted by the Department of Financial Protection and Innovation, which became effective in 2022.

The disclosure requirement matters because it creates a record. If the funder failed to provide the required disclosures, or if the disclosures were inaccurate or misleading, the failure is a violation of California law that can be used as leverage in a dispute. The disclosure also provides the business owner with the information needed to calculate the effective cost of the advance and compare it to the cost of alternative financing, a comparison the MCA industry has historically prevented.

California’s Unfair Competition Law, codified in Business and Professions Code Section 17200, prohibits any unlawful, unfair, or fraudulent business act or practice. The statute is broad. It encompasses violations of other laws, including lending laws, disclosure requirements, and debt collection statutes, and provides for injunctive relief and restitution. A business owner who can demonstrate that the MCA funder’s conduct was unlawful, unfair, or fraudulent has a cause of action under Section 17200.

Recharacterization Under California Law

California courts apply the same risk-based analysis used in other jurisdictions to determine whether an MCA is a loan. If the funder bore no genuine risk of loss, if the daily payments were fixed, the personal guarantee eliminated the business risk, and the reconciliation clause was never honored, the transaction may be recharacterized as a loan.

California’s usury protections are embedded in the state constitution, Article XV. The constitutional usury limit is 10% per annum for loans not made by exempt lenders. However, the California Finance Lenders Law provides an exemption for licensed lenders, and many MCA companies are not licensed under this framework. If the MCA is recharacterized as a loan made by an unlicensed lender, the constitutional usury cap applies. An effective APR of 150% on a recharacterized loan made by an unlicensed lender exceeds the constitutional cap by a factor of fifteen.