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.
