They told you it was a purchase of future receivables. The contract says purchase. The daily withdrawal says otherwise. The legal distinction between the two is the most consequential question in your MCA dispute.
A merchant cash advance is structured as a purchase agreement. The funder purchases a portion of your future receivables at a discount. You do not borrow money. You sell future revenue. That is the theory. The theory matters enormously, because loans are regulated and purchases are not. The funder’s entire business model — its pricing, its collection methods, its freedom from disclosure requirements — depends on the transaction being classified as a purchase.
If the MCA is a loan, it is subject to state usury laws that cap interest rates. It is subject to truth-in-lending disclosure requirements that mandate clear presentation of the annual percentage rate. It is subject to banking regulations that govern lending practices. If it is a purchase of future receivables, it is subject to none of these frameworks. The classification is the shield, and the funder holds it up at every opportunity.
What Makes a Loan a Loan
Courts have identified several factors that distinguish a loan from a true purchase of receivables. The most critical factor is risk. In a genuine purchase, the buyer assumes the risk that the purchased asset — your future receivables — may not materialize. If your revenue drops to zero, the funder’s return drops to zero. The funder bought the upside and accepted the downside. That acceptance of downside risk is what makes a purchase a purchase.
In a loan disguised as a purchase, the funder has systematically eliminated every form of downside risk. Fixed daily payments that do not fluctuate with revenue. Personal guarantees that shift the loss from the business to the owner. confessions of judgment that allow the funder to collect through the courts regardless of business performance. Reconciliation clauses that exist on paper but are denied, delayed, or ignored in practice. UCC liens on all business assets providing the funder with collateral. Cross-default provisions that trigger default on one agreement if you default on another.
When every safety net is in place, the funder’s position is indistinguishable from that of a lender. The funder advanced money. The funder will collect a fixed amount regardless of the business’s performance. The funder has security and guarantees ensuring repayment. The label on the contract says “purchase.” The substance of the transaction says ���loan.”