The Document Says One Thing; the Math Says Another

The contract you signed calls itself a Purchase and Sale Agreement for Future Receivables. It is not, by its own terms, a loan. This characterization is not incidental. It is the architecture on which the entire MCA industry is constructed, because a purchase of future receivables is not subject to usury laws, lending regulations, or the consumer protections that govern traditional loans. If the instrument is a loan, everything changes. The interest rate that was described as a factor rate becomes an APR that, in most cases, exceeds the criminal usury threshold. The agreement that was described as unregulated becomes an illegal lending instrument. The funder that was described as a purchaser becomes an unlicensed lender.

Courts have been deciding this question with increasing frequency, and the decisions have not been uniformly favorable to funders. What follows are five indicators that your MCA may be a loan in disguise.

The Payments Do Not Fluctuate With Revenue

The first and most significant indicator is whether your daily or weekly payments adjust based on your actual revenue. The defining characteristic of a true purchase of future receivables is contingency: the funder purchased a percentage of your future sales, and if sales decline, the payment should decline proportionally. If your payments are fixed (the same amount debited every day regardless of what your business earned), the instrument functions as a loan with fixed payments, not a purchase of variable future income. Courts, including the New York Court of Appeals and trial courts in Westchester County, have examined this factor closely. Where the funder’s actual practices show no genuine contingency in repayment, courts have reclassified the MCA as a loan.

The Agreement Lacks a Reconciliation Provision

The second indicator is structural. A reconciliation clause permits the borrower to request an adjustment to the daily payment based on documented revenue decline. This clause is the contractual mechanism that makes the contingency real. If the agreement does not contain one, or if it contains one that the funder systematically ignores, the product is designed to collect a fixed amount regardless of performance. That is what loans do.

Review the agreement. If there is no reconciliation provision, note its absence. If there is one, request a reconciliation and observe the funder’s response. A funder that refuses to reconcile has, in the view of several courts, demonstrated that the contingency was illusory.

There Is a Fixed Repayment Term

The third indicator is the presence of a maturity date or a fixed repayment period. A true purchase of future receivables has no fixed term; the funder receives payments until the purchased amount is collected, however long that takes. If the agreement specifies that the full purchased amount must be repaid within a defined period (six months, twelve months), the instrument has a term. Loans have terms. Purchases of future receivables do not. This distinction has been outcome‑determinative in cases where the borrower raised a usury defense.

You Received Less Than the Stated Advance Amount

The fourth indicator is financial. Review the amount the funder actually deposited into your account against the amount stated in the agreement. If fees, origination charges, or other deductions reduced the net funding below the stated advance, the effective cost of the instrument increases. In the FTC’s action against RCG Advances, the court found that the funder deducted undisclosed fees from the advance, causing borrowers to receive less than promised while remaining obligated to repay the full purchased amount. This practice, when combined with a factor rate, can produce an effective APR that no court would find consistent with a good‑faith purchase of receivables.

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The Funder Has Called It a Loan

The fifth indicator is the simplest to identify and the hardest for the funder to explain. Review every piece of correspondence you have received from the funder: emails, letters, text messages, voicemails. If the funder or its representatives have referred to the advance as a loan, the interest rate, your monthly payment, or any other lending terminology, they have described the instrument in terms that contradict its contractual characterization. A funder that calls its product a loan has, in the eyes of a court evaluating the true nature of the agreement, provided evidence against its own position.

These five indicators do not, individually or collectively, guarantee that a court will reclassify your MCA as a loan. They are signals, and they must be evaluated by an attorney who understands the case law and the specific factual circumstances of your agreement. But the possibility that your MCA is an illegal loan is not academic. It is the defense that has produced the most consequential results in MCA litigation over the past three years, and it begins with recognizing the signs.