6 Ways Courts Are Ruling That MCAs Are Actually Loans (And Why That Matters for Your Case)

The agreement says "purchase of future receivables." The court says otherwise.

For years, the MCA industry operated in a regulatory gap created by three words: not a loan. Because a merchant cash advance is structured as a purchase of the business's future revenue rather than a lending arrangement, MCA funders claimed exemption from usury statutes, lending regulations, and the disclosure requirements that govern traditional financing. The language of the contracts reinforced this position. Every agreement described itself as a commercial purchase, not a loan.

Courts have begun to disagree. And the consequences of that disagreement, for business owners currently carrying MCA debt, are substantial.

The Three-Factor Test

New York courts, where the majority of MCA litigation is adjudicated, apply a three-factor test to determine whether an agreement that calls itself a purchase of receivables is, in substance, a loan. The test examines three elements.

The first is whether the agreement contains a genuine reconciliation provision. A true purchase of future receivables adjusts payments based on actual revenue. If the merchant earns less, the funder receives less. If the reconciliation clause is illusory (present in the contract but impossible to activate in practice), the agreement operates as a fixed-payment obligation, which is the defining feature of a loan.

The second is whether the agreement has an indefinite term. A loan has a maturity date. A purchase of future receivables does not, because repayment depends on the merchant's sales, which are unpredictable. If the agreement specifies a fixed repayment timeline or an estimated payoff date, it resembles a loan more than a purchase.

The third is whether the funder has recourse if the merchant declares bankruptcy. In a true sale of receivables, the funder bears the risk that the business fails and the receivables never materialize. If the agreement provides the funder with recourse through a personal guarantee that eliminates this risk, the transaction is not a sale. It is a loan with extra steps.

When an agreement fails all three factors, courts reclassify it. The consequences cascade.

Adar Bays v. GeneSys ID: The Framework Becomes Precedent

The New York Court of Appeals decision in Adar Bays, LLC v. GeneSys ID, Inc. established the analytical framework that lower courts now apply to MCA agreements. The court held that the determination of whether an agreement is a loan or a true sale depends on the economic reality of the transaction, not the labels the parties affixed to it.

This ruling moved the analysis from contract language to contract function. A document that calls itself a purchase of receivables, but operates as a fixed-payment lending arrangement with full recourse against the borrower, is a loan regardless of its title.

The decision did not surprise practitioners. It surprised funders.

Yellowstone Capital: The Billion-Dollar Confirmation

The January 2025 settlement between the New York Attorney General and Yellowstone Capital was not merely a financial event. It was a legal one. The Attorney General's complaint alleged that Yellowstone's advances were loans disguised as merchant cash advances, carrying interest rates that reached eight hundred percent annually. The settlement (which included a billion-dollar judgment, the cancellation of over five hundred million in merchant debt, and a permanent ban on Yellowstone's participation in the MCA industry) confirmed that the regulatory apparatus will pursue funders whose agreements fail the loan-versus-purchase analysis.

The lawsuit continues against Delta Bridge and remaining individual defendants. The signal to the industry is unambiguous: the label on the contract does not determine its nature.

The agreement called it a purchase. The court called it a crime.

Bankruptcy Courts Are Forcing the Question

When a business with MCA obligations files for Chapter 11 reorganization, the MCA funder must decide whether to file a proof of claim. If it does, the debtor can object and request that the court reclassify the transaction as a loan. If the court agrees, the claim is recalculated using legally permissible interest rates rather than the original factor rate.

Recent bankruptcy court decisions have examined MCA agreements with increasing skepticism. A 2025 ruling in the Bankruptcy Court for the District of Maryland analyzed the personal guarantee provisions of an MCA and concluded that the guarantee did not, in that case, convert the transaction into a loan, because it did not absolutely guarantee payment. The court drew the line carefully, but the fact that it drew the line at all indicates that bankruptcy courts are willing to scrutinize these agreements at the claim-by-claim level.

The 2024 decision in In re Watchmen Security LLC from the Bankruptcy Court for the Southern District of Indiana further developed this analysis, examining whether the MCA funder's security interest in the debtor's receivables survived the bankruptcy filing.

Whether the court intended these decisions to reshape the MCA industry or merely to resolve the cases before them is a question worth considering. The reshaping is happening regardless.

Fixed Daily ACH Withdrawals as Evidence of Loan Structure

Courts have identified the mechanism of repayment as a key indicator. A true purchase of future receivables is repaid through a variable holdback (a percentage of actual sales, deducted by the payment processor). The payment fluctuates with revenue. The funder accepts the risk of low-revenue periods.

A fixed daily ACH withdrawal does not fluctuate. It deducts the same amount each business day regardless of whether the merchant's revenue has increased, decreased, or disappeared. This mechanism is functionally identical to a fixed-payment installment loan.

When courts encounter an MCA agreement that prescribes fixed daily ACH withdrawals, combined with an illusory reconciliation clause that prevents adjustment, they have found sufficient evidence to reclassify the transaction. The withdrawal mechanism is not, by itself, dispositive. Combined with the other factors, it completes the picture of a loan masquerading as a commercial purchase.

What Reclassification Means for Your Case

If a court determines that your MCA agreement is a loan, the consequences for the funder are severe. New York's civil usury cap is sixteen percent. Its criminal usury cap is twenty-five percent. An MCA with an effective APR of one hundred fifty percent, three hundred percent, or higher violates both.

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For the merchant, reclassification means the obligation may be voided entirely. New York courts have the authority to declare usurious loan agreements unenforceable and to order the return of excess payments. The merchant does not merely owe less. The merchant may owe nothing.

This is not a theoretical outcome. It is the outcome the Yellowstone Capital settlement produced for over eighteen thousand merchants. It is the outcome that courts across New York are evaluating in pending cases. And it is the outcome that your agreement may support, if the agreement is examined by someone who knows what to look for.

The Label on Your Contract Is Not the Law

The MCA industry built its business model on the premise that calling an advance a purchase of receivables would place it beyond the reach of lending regulations. For a time, that premise held. Courts deferred to the contractual language. Regulators focused elsewhere. Funders operated in the gap.

The gap is closing. Court by court, ruling by ruling, the analysis is shifting from what the contract says to what the contract does. And what many MCA contracts do, when examined under the framework courts now apply, is function as high-interest loans.

If you are carrying MCA debt, the question is not whether your agreement calls itself a loan. The question is whether a court, applying the three-factor test to your specific contract, would reach that conclusion. An attorney who practices in this space can answer that question. The answer may transform your legal position entirely.

That assessment begins with a consultation. The consultation is a diagnosis, not a commitment.