6 things your MCA funder cannot legally dothe limits the contract never mentions, 2026

Six things a merchant cash advance funder cannot legally do, whatever the collection call says

Merchant cash advance funders operate in a space with thin regulation and a lot of intimidation. Most of their leverage comes from the contract you signed and from your assumption that they can do whatever they threaten to do. They cannot. Some of the most common collection tactics in this industry are illegal, and knowing which ones changes how you respond when a funder starts making calls.

Here are six lines a funder is not allowed to cross.

File a confession of judgment against you in New York if your business is not in New York

Before August 2019, this was the industry's favorite weapon. You signed a COJ at funding, and the moment the funder declared a default, they filed it in a New York county clerk's office and had a judgment against you within days. No lawsuit, no hearing, no chance to respond. It worked against businesses in Texas, Florida, anywhere.

New York amended CPLR 3218 to shut that down. A confession of judgment can now only be entered against a defendant who resides in New York, and the filing has to happen in the county where you reside. If your business is in Ohio and a funder files a New York COJ against you, that judgment is vulnerable to being vacated.

Funders know this. Some still include COJs in contracts as a scare document, and some try filing in other states with looser rules. But the New York shortcut that built this industry's collection machine is gone for out-of-state merchants, and a judgment entered in violation of the statute can be attacked.

Refuse to reconcile your payments

The reconciliation clause is the legal foundation of the entire product. An MCA is supposedly not a loan because the funder is buying a percentage of your future receivables. If your revenue drops, your payments are supposed to drop with it. The reconciliation provision is what lets the funder claim the money is contingent on your sales rather than absolutely repayable.

So when your revenue falls and you request reconciliation, the funder has to honor it. A funder who keeps debiting the same fixed daily amount regardless of your actual receivables, or who makes reconciliation practically impossible to obtain, is undermining its own contract. New York courts have repeatedly pointed to illusory or ignored reconciliation rights as evidence that the transaction was a disguised loan. That matters because of item six below.

If you submitted bank statements showing a revenue decline and the funder ignored the request, document everything. That paper trail is worth real money in a settlement negotiation.

Freeze your bank account without a judgment

Funders love to imply they can lock up your operating account tomorrow morning. In almost every case they cannot. A restraining notice on a bank account requires a judgment first. That means the funder has to sue you, win or obtain a judgment by default, and then serve the restraining notice. Pre-judgment attachment exists in theory, but it requires a court order and a showing that most funders cannot make.

What funders actually do is send UCC lien notices to your bank or payment processor and hope the institution freezes funds voluntarily out of caution. That is a different mechanism with different rules, and it depends on a valid security interest and an actual default. A threat that "we will freeze your account this week" from a funder holding no judgment is usually a bluff, and in some cases it is an actionable deceptive practice.

Demand payment from your customers when you are not in default

This one causes more business damage than any other tactic. The funder sends letters to your clients, your card processor, or your marketplace platform announcing a UCC lien on your receivables and instructing them to redirect payment to the funder.

Article 9 of the UCC does permit a secured party to notify account debtors and collect directly. But that right is triggered by default. A funder who blasts your customer list while you are current on payments, or who declares a manufactured default to justify the letters, is exposed to claims for tortious interference and breach of contract. The same goes for notices that overstate the lien, claim rights the contract does not grant, or go to parties who owe you nothing.

These letters are designed to make you panic and pay, because a client who receives one may stop doing business with you entirely. If it happens without a legitimate default, that damage is something you can pursue, not just absorb.

Threaten you with arrest or criminal charges

Failing to repay a debt is a civil matter. It is not theft, it is not fraud by itself, and no one is going to jail because a business could not cover its daily ACH pull. Collectors who threaten criminal prosecution, arrest, or a call to the district attorney over nonpayment are engaging in a classic deceptive collection tactic that violates the FTC Act and state consumer protection statutes.

There is a narrow real exception, and funders exploit the confusion around it. If a merchant blocks the ACH or moves to a new bank account, some contracts frame that as a breach of representations, and a few aggressive funders file criminal complaints alleging fraud. Those referrals rarely go anywhere, but the threat is the point. Understand the distinction: nonpayment is civil, period. A funder who says otherwise is either lying to you or describing a fraud theory a prosecutor is unlikely to touch.

Record the threats. Keep the voicemails. Threats of criminal prosecution show up as leverage in settlement talks on your side of the table.

Collect at loan-shark rates if the advance is really a loan

Run the math on a typical advance and you get an effective annual rate of 60, 100, sometimes 300 percent. The only reason that survives is the legal fiction that an MCA is a purchase of receivables rather than a loan. New York criminal usury caps interest at 25 percent per year, and that cap applies to loans.

Courts decide which side of the line a contract falls on by looking at substance. Fixed payments with no functioning reconciliation, a definite repayment term, and full recourse against the merchant in bankruptcy all point toward a loan. When a court recharacterizes an advance as a loan, the usury statute comes into play, and a criminally usurious loan in New York is void. The funder can lose the right to collect anything.

Most cases never get that far, and recharacterization is a fight, not a formality. But funders settle cases specifically to avoid this ruling, which tells you how much the argument is worth. If your contract has a dead reconciliation clause and a fixed payment schedule, you have leverage that most merchants never realize they hold.

What to do if a funder crosses one of these lines

Do not negotiate from panic. Funders count on merchants who believe every threat and pay to make the calls stop. Save every letter, email, and voicemail. Pull your contract and read the reconciliation and default provisions before you respond to anything.

Then talk to someone who does this every day. Delancey Street negotiates MCA settlements and knows which funder threats are real, which are bluffs, and which are violations you can use. If a funder is threatening your bank account, contacting your customers, or refusing to reconcile, call us before you send them another dollar.

Frequently Asked Questions

What is the usury cap on MCAs in New York?

New York State Law prohibits lenders from charging annual interest rates of more than 16 percent on a loan. Additionally, lenders can be criminally charged with usury if they offer a loan with an interest rate of more than 25 percent.

Do merchant cash advances charge interest?

Unlike a traditional business loan, a merchant cash advance isn't technically a loan; rather, the funder is buying your future receivables. Therefore, the funder can legally claim not to charge an "interest rate".

Can a merchant cash advance be paid off early?

If you want to pay off your merchant cash advance early, that's typically an option, but most funders will still collect the full amount.

What's a personal guarantee on an MCA?

Personal guarantees on merchant cash advances are more about leverage than collection. Few merchants have enough in the bank to cover the entire balance on the advance. And merchants who sign personal guarantees don't normally expect that signature to matter.

When is a contract clause an unconscionable business practice?

For a merchant cash advance, an unconscionable clause is generally an off-market provision: something inserted to deter a merchant from fighting the agreement.