The Debt That Was Never a Loan

The merchant cash advance does not announce itself as a loan. It does not carry the vocabulary of lending, does not disclose an interest rate, does not submit to the regulatory apparatus that governs consumer or commercial credit. It presents itself as a purchase: a funder acquires a portion of a business’s future receivables at a discount, and the business repays by surrendering a fixed percentage of daily revenue until the purchased amount is returned. The distinction is not semantic. It is structural. And it is the reason the entire MCA industry exists in the form it does.

A restaurant owner in need of forty thousand dollars does not receive a loan document. She receives a Receivables Purchase Agreement. The language inside that document describes a “purchased amount,” a “purchase price,” and a “specified percentage.” Nowhere does the word “interest” appear. The funder advances the purchase price, and in return, the business remits daily or weekly payments, withdrawn from its bank account via ACH, until the purchased amount has been collected. The purchased amount is always larger than the advance. The difference between what the business receives and what it repays is the funder’s profit, expressed not as an interest rate but as a factor rate.

The contract calls it a purchase. The bank account calls it a deduction. The business owner calls it something else entirely.

In eleven of the fourteen MCA agreements we reviewed last quarter, the factor rate fell between 1.2 and 1.5. That means a business receiving one hundred thousand dollars would repay between one hundred twenty thousand and one hundred fifty thousand dollars. The repayment period, which the contract does not define as a “term” (because terms belong to loans), typically runs between four and eighteen months. The daily withdrawal amounts, which can range from several hundred to several thousand dollars, begin within days of funding.

The mechanical simplicity of the arrangement conceals the cost. A factor rate of 1.4 on a six-month repayment schedule does not translate to a 40 percent annual interest rate. It translates to something closer to 80 percent, and in some structures, well above 100 percent. The reason: the principal is not outstanding for the full repayment period. Each daily payment reduces the balance, but the “purchased amount” does not adjust. The business pays the full premium regardless of how quickly the funder recoups the advance.

The MCA industry’s position, maintained in courtroom after courtroom, is that this structure places risk on the funder. If the business generates no revenue, it owes nothing. If it closes, the funder absorbs the loss. The reconciliation clause, which we will address in a separate discussion, is the contractual mechanism that supposedly protects the merchant: if revenue declines, the merchant may request an adjustment to the daily payment amount. Whether that mechanism functions in practice is, if we are being precise, a different question from whether it exists on the page.

Courts have examined this distinction with increasing scrutiny. The three-factor test applied in New York evaluates whether an MCA is a true purchase of receivables or a disguised loan: whether a reconciliation provision exists and is genuine, whether the agreement imposes a definite repayment term, and whether the funder retains recourse if the merchant declares bankruptcy. In LG Funding, LLC v. United Senior Properties of Olathe, the Second Department held that for a transaction to constitute a loan, the funder must be absolutely entitled to repayment under all circumstances. If the funder bears actual risk of loss, the transaction is a purchase. If that risk is illusory, it is a loan dressed in different clothing.

The distinction matters because loans are subject to usury laws. Purchases of receivables are not. A transaction characterized as a loan carrying an effective annual percentage rate above the statutory ceiling is void as a matter of law in New York. A transaction characterized as a purchase carrying the same effective rate is, at least in theory, entirely enforceable.

This is where the architecture of the MCA industry rests. Not on the economics of the transaction, which often resemble high-interest lending in every functional respect, but on the legal characterization that exempts it from the rules designed to prevent precisely this kind of cost.

The Money Moves Before the Ink Dries

The speed of MCA funding is not incidental to its design. It is the design. Traditional commercial lending requires documentation, underwriting, credit review, collateral assessment, and time. An MCA can fund in twenty-four to forty-eight hours. For a business owner facing a tax lien, a payroll shortfall, or a supplier demanding payment, the speed is not a feature. It is the reason the contract gets signed.

The application process typically requires three to six months of bank statements, a government-issued identification, and a voided check. There is no financial statement analysis in the traditional sense. The underwriting, such as it is, focuses on daily bank balances and deposit consistency. A business that deposits three thousand dollars per day is a better candidate than one that deposits ten thousand dollars once a month, because the daily withdrawal model depends on predictable cash flow.

Once approved, the funder wires the advance to the business’s bank account. The ACH withdrawal begins, typically within three to five business days. There is a particular silence in that interval between receiving the funds and feeling the first deduction. That silence is the last moment the business owner possesses the money without also possessing the obligation.

And here is where the architecture becomes consequential: the daily withdrawals are fixed amounts, not percentages, in most agreements we encounter. The contract may reference a “specified percentage of receivables,” but the daily debit is a dollar figure calculated at origination based on projected revenue. If the business’s revenue declines, the debit does not automatically adjust. The merchant must invoke the reconciliation clause, request documentation, and wait for the funder’s response. In three cases this year alone, the funders we dealt with simply did not respond.

The MCA is not a product designed for businesses with options. It is designed for businesses without them. That is not a moral judgment. It is a description of the market the product serves, and it explains why the terms are what they are.

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Todd Spodek

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Featured on Netflix's "Inventing Anna," Todd Spodek brings decades of high-stakes criminal defense experience. His aggressive approach has secured dismissals and acquittals in cases others deemed unwinnable.

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What the Contract Cannot Hold

The question most business owners ask when they call our office is not “what is an MCA.” They know what it is by then. The question is whether the contract they signed means what the funder says it means, or whether there is room between the language on the page and the reality of how the money has moved.

There is almost always room.

The contract is a document. The relationship between funder and merchant is a series of actions, and actions can diverge from documents in ways that alter the legal character of the entire arrangement. A reconciliation clause that is never honored. A “purchase” that functions as a fixed repayment obligation. A risk allocation that exists on paper but not in practice. These divergences are not academic. They are the basis on which courts have recharacterized MCA agreements as loans, voided them as usurious, and vacated judgments obtained under their authority.

Consultation is where this conversation begins. The contract is a starting point. What happened after the contract was signed is where the law lives.