The agreement says "purchase of future receivables." The court says otherwise.
For years, the MCA industry operated in a regulatory gap created by three words: not a loan. Because a merchant cash advance is structured as a purchase of the business's future revenue rather than a lending arrangement, MCA funders claimed exemption from usury statutes, lending regulations, and the disclosure requirements that govern traditional financing. The language of the contracts reinforced this position. Every agreement described itself as a commercial purchase, not a loan.
Courts have begun to disagree. And the consequences of that disagreement, for business owners currently carrying MCA debt, are substantial.
The Three-Factor Test
New York courts, where the majority of MCA litigation is adjudicated, apply a three-factor test to determine whether an agreement that calls itself a purchase of receivables is, in substance, a loan. The test examines three elements.
The first is whether the agreement contains a genuine reconciliation provision. A true purchase of future receivables adjusts payments based on actual revenue. If the merchant earns less, the funder receives less. If the reconciliation clause is illusory (present in the contract but impossible to activate in practice), the agreement operates as a fixed-payment obligation, which is the defining feature of a loan.
The second is whether the agreement has an indefinite term. A loan has a maturity date. A purchase of future receivables does not, because repayment depends on the merchant's sales, which are unpredictable. If the agreement specifies a fixed repayment timeline or an estimated payoff date, it resembles a loan more than a purchase.
The third is whether the funder has recourse if the merchant declares bankruptcy. In a true sale of receivables, the funder bears the risk that the business fails and the receivables never materialize. If the agreement provides the funder with recourse through a personal guarantee that eliminates this risk, the transaction is not a sale. It is a loan with extra steps.
When an agreement fails all three factors, courts reclassify it. The consequences cascade.
Adar Bays v. GeneSys ID: The Framework Becomes Precedent
The New York Court of Appeals decision in Adar Bays, LLC v. GeneSys ID, Inc. established the analytical framework that lower courts now apply to MCA agreements. The court held that the determination of whether an agreement is a loan or a true sale depends on the economic reality of the transaction, not the labels the parties affixed to it.
This ruling moved the analysis from contract language to contract function. A document that calls itself a purchase of receivables, but operates as a fixed-payment lending arrangement with full recourse against the borrower, is a loan regardless of its title.
The decision did not surprise practitioners. It surprised funders.
Yellowstone Capital: The Billion-Dollar Confirmation
The January 2025 settlement between the New York Attorney General and Yellowstone Capital was not merely a financial event. It was a legal one. The Attorney General's complaint alleged that Yellowstone's advances were loans disguised as merchant cash advances, carrying interest rates that reached eight hundred percent annually. The settlement (which included a billion-dollar judgment, the cancellation of over five hundred million in merchant debt, and a permanent ban on Yellowstone's participation in the MCA industry) confirmed that the regulatory apparatus will pursue funders whose agreements fail the loan-versus-purchase analysis.
The lawsuit continues against Delta Bridge and remaining individual defendants. The signal to the industry is unambiguous: the label on the contract does not determine its nature.
The agreement called it a purchase. The court called it a crime.
Bankruptcy Courts Are Forcing the Question
When a business with MCA obligations files for Chapter 11 reorganization, the MCA funder must decide whether to file a proof of claim. If it does, the debtor can object and request that the court reclassify the transaction as a loan. If the court agrees, the claim is recalculated using legally permissible interest rates rather than the original factor rate.
