6 Things Your MCA Funder Cannot Legally Do (Even Though They Will Try)

Your funder is out of control, but federal law protecting you from the problem generally doesn’t cover business debts. It’s not a complete answer to the problem, though. State laws can provide a fix, as can court rules, your contract, or a word from a judge to get the lender to knock it off. In short, a funder can’t threaten violence or arrest, can’t lie to your customers to smear your reputation, can’t take money from your bank account without your authorization, can’t use an out-of-state confession of judgment, or can’t disguise a high-rate loan as a sale of receivables. Freezing accounts without a judgment is always off limits too.

1. Threats of violence or arrest

Some funders have sought to boost their collection success by threatening borrowers with violence and arrest, and impersonating sheriffs and marshals. Needless to say, such tactics are not lawful. For example, the FTC banned one funder from the business after its leader terrorized a client for non-payment. The FTC alleged RCG Advances told one man they’d “break his jaw.” If you are facing abuse like this, take screenshots and notes of each threatening, offensive, or misleading email, call log, voicemail, or text. A history of conduct like this can make a case far more valuable.

2. Lies to your customers

Your contract may also allow the funding company to contact customers after you default to get money you owe, such as by directing your clients to pay off old invoices, if the UCC process has gone correctly. But that’s different from telling your clients you don’t pay your bills or making false allegations of crime. Misrepresenting a legal right, spreading lies about your activities and trying to scare off your customers over money you owe can cross a line and expose the funder to liability. State laws may address this, but conduct that exceeds rights can be covered by general tort law like unfair and deceptive practices, tortious interference, and defamation.

3. Debits your contract does not allow

Among its other rights under the contract, the agreement may allow your funder to debit your account for money you owe each day. But it can’t keep debiting your bank account the full daily payment when your sales drop and you ask to reconcile the amount. And the funding company cannot run your balance in full at once without the notice your contract requires, or split the debits across originator IDs to dodge the stop-payment provisions. Texas, since Sept. 1, 2025, has gone further: the state bans your funder from electronically drawing your company’s bank account unless it holds a first-priority, perfected security interest. If a funder has misused your contract authority to debit your bank account, call your bank’s ACH department to stop auto payments from any originator ID. It’s important to specify all the IDs, not just one or two. Then it’s time to revoke your authorization in writing and move your funds to a new bank. If the funder took money out of your account without proper authorization, or used a forged or pre-signed authorization for money not due, you may be able to recover that money too. A call to customer service rarely works. Action by your bank combined with revoking authorization in writing can.

4. Out-of-state confessions of judgment

Your contract may have a confession of judgment that, once signed, lets the funder bypass courts and petition for a judgment without notifying you. Since 2019, though, New York requires a confession to be filed in the NY county where the business is located. These confessions are void in Texas in sales-based financing. The FTC alleged RCG Advances used its confession judgments to take debtors’ assets improperly. The agreement resolving the case required the company to vacate the judgments, release liens against former customers, and pay more than $2.7 million in refunds. So if you live in one state and the funder filed the confession of judgment in another, it may be worth pushing back against the judgment.

5. Collecting a loan dressed up as an advance

On paper, merchant cash advances are sales of receivables, or future revenue streams. But funders stray. If your contract has no reconciliation and a fixed payment, some courts have held the deal was a loan in disguise. A New York appeals court noted three things to weigh: a real reconciliation provision, a finite term, and recourse against the merchant in bankruptcy. The New York Attorney General sued Yellowstone Capital for treating its money as a sale when they functioned as straight loans. The settlement canceled about $534 million in merchant debt, including guarantees, and banned the business from the industry. And if the deal is a loan, in New York knowingly charging more than 25 percent a year on it is a felony. The more your deal doesn’t match the realities of your deal, the more your funder’s enforcement is exposed to challenge.

6. A freeze without a judgment

A funder can’t freeze your account without a judgment, so claiming it’s going to freeze your account when it doesn’t have the court’s authority is a lie. Another false tale is that a judgment has been signed. If the funder claims to be an officer of the court or a marshal, they probably are not. Once your lender has a judgment, that can bring restraining notices to your bank. Those can freeze all your money up to twice the judgment. A freeze can sometimes be modified or vacated if it’s over-restrained or the judgment behind it was defective. Even if the funder has a judgment, some defaults can be voided because the court didn’t actually have jurisdiction to hear the case, or because the funder did not serve you in the proper way. But a default judgment is a dangerous status quo. That’s why it’s critical to answer any lawsuit filed by a funder within 20 days if you’re served within New York state (30 days if served out-of-state).

Most of These Fights End in a Deal

In the end, most of these fights end in a deal, not a trial. Many funders agree to 40-60% of the debt. Getting there depends on many factors, but your leverage matters, so collecting evidence of their misbehavior can help. As important as that is, if you’re blocking payments to your funder, your contract may treat that as a default - so doing it without a plan can backfire.