When MCA Contracts Violate State Usury Laws

The factor rate looked like a number. The annual percentage rate looks like a statute violation. The distinction between the two is the distance between what you were told and what you were charged.

Usury laws set a maximum interest rate that a lender can charge. The specific cap varies by state. In New York, civil usury is capped at 16% per annum for most transactions. Criminal usury is capped at 25% per annum. A loan that exceeds the criminal usury threshold is void and unenforceable as a matter of law. Not voidable — void. The contract is treated as if it never existed. The distinction is not academic. A void contract extinguishes the obligation to repay. A voidable contract might be enforced under certain circumstances. Void is absolute.

MCA companies argue that usury laws do not apply because the transaction is a purchase of future receivables, not a loan. When a court recharacterizes the MCA as a loan — because the funder bore no genuine risk of loss — the effective interest rate is calculated. That calculation is where the numbers become devastating for the funder.

The Math

A $50,000 advance with a factor rate of 1.40 means you repay $70,000. The factor rate makes the cost look like 40% — expensive but perhaps manageable for a short-term product. But the factor rate is not an interest rate. It does not account for the time value of the payments.

If the repayment term is six months through daily ACH withdrawals, you are returning principal and the funder’s profit every business day. The funder receives the use of the returned capital throughout the repayment period. By the midpoint of the term, you have returned a significant portion of the principal, but the total repayment amount has not decreased. You are paying the same total regardless of how quickly the principal is returned.

When calculated using standard APR methodology — the methodology required for loans under truth-in-lending regulations — the effective annual percentage rate on this transaction is not 40%. It is not 80%. Depending on the specific terms, it may be 150%, 200%, or higher. Some MCAs, when the math is done properly, produce effective APRs in excess of 300%.

These rates exceed the usury cap in every state that has one. They exceed the criminal usury threshold in New York by a factor of six or more. They exceed the civil usury threshold in most states by an even wider margin.

State Variations

Not every state has a usury statute, and not every usury statute applies to commercial transactions. Some states exempt commercial loans above a certain principal threshold. Some states have no usury cap at all for commercial transactions between businesses. The applicability depends on the state whose law governs the agreement, the nature of the transaction as characterized by the court, the principal amount, and the specific exemptions available under the governing state’s law.

Many MCA agreements contain choice-of-law clauses selecting a state with favorable usury treatment — often a state with no usury cap for commercial transactions, or a state where the exemption thresholds are most likely to apply. Whether that choice-of-law clause is enforceable is itself a litigable question. Courts have declined to enforce choice-of-law clauses when the chosen state has no substantial relationship to the transaction, when the clause was buried in adhesive fine print, or when enforcing the clause would violate the fundamental public policy of the state with the most significant relationship to the transaction.

If you live in New York and signed an MCA with a choice-of-law clause selecting Utah — a state with no usury cap for commercial transactions — a New York court may decline to apply Utah law if the transaction has no meaningful connection to Utah and the clause was selected specifically to evade New York’s usury protections. The analysis is fact-intensive and jurisdiction-specific, but the argument is available and courts have been receptive to it.

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What to Do

If you believe your MCA carries an effective interest rate that exceeds your state’s usury cap, the first step is an attorney’s review of the agreement and the payment history. The attorney calculates the effective rate using the actual payment amounts and timing. The attorney determines which state’s law applies — and whether the choice-of-law clause, if any, is enforceable. The attorney assesses whether the transaction can be recharacterized as a loan based on the funder’s actual behavior and the contractual provisions. The attorney advises whether a usury defense or affirmative claim is viable.

The consultation is the math. The math determines the strategy. The strategy determines whether you continue paying an obligation that may be void, or whether you challenge it with the law on your side.

Usury is not a technicality. Usury laws exist because society determined that charging excessive interest rates is harmful enough to warrant prohibition. The MCA industry built a structure designed to avoid that prohibition by labeling loans as purchases. When the label is stripped away and the math is performed, the rates are not merely above the cap. They are multiples of it. The law’s response to that level of excess is not a slap on the wrist. It is voidness. The contract ceases to exist, and the obligation it created ceases with it. That is the law’s most powerful remedy, and it is available to any business owner whose MCA, properly characterized, exceeds the usury threshold.