How courts are recharacterizing MCAs as usurious loansthe risk test, 2026

Recharacterization: how a purchase of receivables becomes a loan with a rate on it

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A merchant cash advance ("MCA") is a form of business financing where a lender advances a lump sum payment to a small business, and the business agrees to repay the advance (plus substantial fees) by automatically remitting a fixed amount daily (or weekly) via ACH debit from its bank account. The lender typically structures the transaction as a purchase of a "specific amount" of the business's future receivables at a discount. For example, the lender "purchases" $100,000 of receivables for $70,000. The business is obligated to pay the lender a fixed daily amount, and the contract often includes personal guarantees.

MCAs generally target businesses that are struggling financially. The application process is minimal and simple—an easy reason why this form of business funding is so popular. Most small businesses soon realize that they have effectively entered into an onerous form of loan agreement at exorbitant rates.

Lenders rely on two arguments to avoid usury. First, the transaction is not a "loan" because there is no "absolute" obligation to repay principal - payment is allegedly contingent on receivables. They argue that they take the risk that the business's future receivables never come in and therefore the business is never "technically" obligated to repay them. Second, if it is a loan, usury does not apply because businesses cannot assert civil usury, and criminal usury only applies to loans below $2.5 million.

Courts are now looking past form to substance: Does the lender actually take any risk of not being repaid? Where payment is not genuinely contingent, courts have held that the transaction is a loan.

New York Law and Criminal Usury

MCAs nearly always pick New York law and forum. Under New York law, a loan is criminally usurious if the lender "knowingly" charged more than 25% interest per year (for loans under $2.5 million), as codified in Penal Law § 190.40 and Gen. Obligs. Law § 5-521(3). Corporations may not be able to claim civil usury as a defense, but they can claim criminal usury if the interest rate is over 25%.

The 2021 Court of Appeals case of Adar Bays, LLC v. GeneSYS ID, Inc. concluded that a criminally usurious loan agreement is void ab initio - from inception - and will no longer be enforced by courts in the state of New York. This means the funder cannot collect anything under the agreement. Not just voidable: void.

A holding that an MCA is criminally usurious is critical in litigation. The agreement becomes unenforceable and absolves the borrower of repayment. Another reason New York is such an attractive venue for criminal usury challenges is that an unsuccessful defense that fails to get an MCA declared as usurious in another state could provide the grounds for a successful collateral attack in New York state and federal courts. Many MCA cases are in federal district court in New York (S.D.N.Y., E.D.N.Y.), especially if parties are in different states or the amount in controversy exceeds $75,000.

Is the Transaction Really a Loan?

The central question is whether the merchant's obligation to repay the advance is "absolute" (as in a loan) or "contingent" (as in a true purchase of future receivables). In LG Funding, LLC v. United Senior Properties of Olathe, LLC, the Second Department identified three factors.

Reconciliation: Does the agreement include a meaningful mechanism for the merchant to adjust payments based on actual receivables? A reconciliation or "true up" means that if the receivables, in any period, do not amount to the agreed fixed sum (such as in times of downturn), the merchant will be allowed to repay the MCA less than it normally would. If the merchant cannot actually reduce daily payments when revenues are down, this is a red flag for a loan. If the merchant fails to meet the required documentation or agreement terms to qualify for a reconciliation, the court is likely to agree with the funder in finding that a reconciliation exists. Note, however, that many MCA funders deliberately and subtly fail to include important information.

Finite repayment period: True receivables purchases have indefinite duration, because they depend on the performance of the business. Many MCAs are indefinite in length and it is difficult to determine a precise termination date. If the period is indeterminate or indeterminable, courts are likely to find that the agreement is not a loan. A set period, on the other hand, demonstrates the parties' intent to create a loan agreement rather than a contract for the purchase of future receivables.

Personal guarantee: If the guarantor must pay regardless of business performance, it is not a true purchase but an absolute repayment obligation. Unlimited personal guarantees and confessions of judgment that can be filed on any default signal absolute repayment, not a contingent sale. A confession of judgment is an automatic entry of a judgment against the merchant in court, streamlining collection. Neither is legal if the underlying agreement is criminally usurious.

Courts also look at the actual practices of the parties in the everyday implementation of their obligations under the agreement - for example, immediately declaring default upon a bounced payment without any meaningful inquiry. Fixed, automated daily debits are a strong indicator of an installment loan, not a variable, contingent sale of receivables. If the MCA funder faces no risk of not receiving its payments (due to an absolute requirement for the merchant to pay, a fixed repayment schedule, a fixed daily remittance schedule), the court is likely to treat the MCA as a loan.

Case Law Trends

New York appellate courts, especially those in the Second and First Judicial Departments, have considered MCA agreements under the state's criminal usury statutes. Some of these decisions have ruled in favor of the funder. In Cash4Cases, Inc. v. Brunetti, the plaintiff funding company agreed to advance a personal injury claimant $25,000 in return for a $50,000 repayment, contingent on the outcome of the litigation. When the claimant failed to pay, the funding company commenced an action for repayment of $75,000. The Appellate Division upheld the trial court's ruling that the agreement was not criminally usurious, stating that the fact that the repayment was contingent upon the success of the claimant's litigation demonstrated that the transaction was not a loan.

However, there is a counter-trend of judicial hostility against funding companies, particularly by lower New York state courts. New Jersey's intermediate appellate courts have also ruled against MCA funders on certain transactions.

In Fleetwood Services, LLC v. Ram Capital Funding, LLC, the Southern District of New York looked at the three factors that determine whether a purported sale is in fact a loan. What matters is the actual operation of the agreement, not the labels used. Lenders rely on the form of the agreement - they call the transaction a "purchase" of future receivables and include language such as "Merchant hereby sells, assigns and transfers to Funder a portion of its future receivables." Lenders sometimes argue that a "not a loan" clause or choice of law provision that eliminates civil usury defenses saves the agreement. New York courts do not give this much weight.

The major trend is that New York state courts will scrutinize MCAs based on their overall characterization of whether these are loan agreements under usury law, despite arguments from MCA funders that these are contracts for the purchase of future receivables. Many MCA agreements contain language designed to give the appearance of a sale of receivables while functionally guaranteeing repayment through fixed daily debits and harsh default provisions.

Consequences of a Usury Finding

The funder cannot collect on the principal, not just interest. The borrower can seek to recover money paid under the agreement, and in some cases courts have ordered funders to return money collected from merchants. This is one of the most significant remedies available in New York under these statutes. Given the potential that MCA lenders may be ordered to repay all advances to the borrower, this trend has become increasingly important.

Prosecutors and state attorneys general may seek charges or civil enforcement against lenders who systematically make criminally usurious loans, and state AGs, especially in New York, are aggressively enforcing criminal usury laws against MCA companies. Plaintiffs have tried to bring RICO claims against MCA funders alleging a "pattern of racketeering activity" based on usury violations. Plaintiffs may also argue fraud or concealment if the agreement was structured to hide a usurious loan, especially if funders deliberately omit critical terms.

This is a highly fluid area of law, and federal courts, state courts, and state AGs are issuing new rulings frequently.