Is My MCA a Loan or Purchase of Receivables - Why It Matters

By MercResolution · Published 2026-04-19 · Updated 2026-07-17

Courts increasingly find MCAs are disguised loans with APRs of 60-400%. If recharacterized, usury laws apply and your agreement may be void. Learn the key factors.

Whether your merchant cash advance (MCA) is legally classified as a loan or a purchase of future receivables is one of the most consequential questions in MCA law — and the answer determines whether state usury laws, licensing requirements, and lending regulations apply to your agreement. Courts have increasingly found that many MCAs are loans disguised as receivables purchases, with effective annual interest rates ranging from 60% to over 400%. When an MCA is recharacterized as a loan, these rates typically far exceed state usury caps, making the agreement void or the interest unenforceable.

The Basic Distinction: True Sale vs. Loan

On paper, an MCA is not a loan. The MCA funder “purchases” a portion of your future credit card receipts or business receivables at a discount. You receive a lump sum today, and the funder collects a fixed amount from your daily or weekly revenue until the “purchased amount” is repaid.

The legal question is whether this transaction is what it claims to be — a genuine purchase of future receivables — or whether it is in substance a loan with a fixed repayment obligation, regardless of how the documents are labeled. Courts apply a “substance over form” analysis: the actual economic terms of the deal, not the labels in the contract, determine its legal character.

"It doesn’t matter what the contract calls it. Courts look at what the transaction actually is — and when the economic reality looks like a loan, they treat it as one."

What Courts Look At: The Key Factors

Through a series of landmark cases, New York courts (where most MCA litigation occurs) have developed a multi-factor test for distinguishing true receivables purchases from disguised loans. Understanding these factors is critical — and it’s exactly the analysis MercResolution performs for every client.

1. Reconciliation Rights

A true purchase of receivables means the funder’s return depends on the business’s actual revenue. If your MCA agreement includes a reconciliation provision — meaning the daily payment adjusts based on actual receipts — this supports the “purchase” characterization. However, if the reconciliation right is illusory (buried in fine print, practically impossible to invoke, or never actually honored by the funder), courts treat it as a sham.

2. Fixed Daily Amount vs. True Percentage

If the funder collects a fixed dollar amount every day regardless of how much revenue your business actually generates, that looks like a loan payment — not a percentage of receivables. A true receivables purchase would take a fixed percentage of actual daily receipts. Most MCAs collect a fixed daily amount via ACH withdrawal, which is the single strongest indicator of loan character.

3. Finite vs. Indefinite Term

Loans have a fixed repayment period. True receivables purchases have an indefinite term because the funder’s recovery depends on when the business generates enough revenue. If your MCA agreement has an estimated or fixed repayment timeline (e.g., “approximately 6 months”), this suggests a loan with a finite term.

4. Personal Guarantee Structure

A guarantee that covers the full “purchased amount” regardless of whether the business generated sufficient receivables suggests the funder has shifted all risk to the business owner — a hallmark of a loan. In a true receivables purchase, the funder bears the risk that the business may not generate enough revenue.

5. Absolute Repayment Obligation

The most fundamental question: if your business closes tomorrow — generating zero future revenue — are you still obligated to pay the full remaining balance? In a true receivables purchase, the answer should be no. If the agreement creates an absolute obligation to repay regardless of business performance, that is a loan.

6. Confession of Judgment

While not part of the formal recharacterization test, the presence of a confession-of-judgment clause is indicative of a lending relationship. New York banned out-of-state confessions of judgment in MCA agreements in 2019, but pre-2019 agreements may still contain them.

The Landmark Cases

Three cases form the foundation of MCA recharacterization law. These decisions are central to the analysis MercResolution performs for every client:

Fleetwood Services v. Ram Capital Funding (N.Y. Sup. Ct. 2019)

The court found that an MCA with fixed daily payments, an illusory reconciliation provision, and a personal guarantee covering the full balance was a loan, not a receivables purchase. The effective APR exceeded 200%. The court voided the agreement as usurious, setting a precedent that has been widely cited in subsequent MCA litigation.

K9 Bytes v. Arch Capital Funding (N.Y. Sup. Ct. 2019)

The court applied a detailed factor-by-factor analysis and found that the MCA was a loan based on fixed daily payments, a guaranteed minimum payment obligation, a personal guarantee covering the full purchased amount, and no genuine reconciliation mechanism. The effective APR was approximately 268%.

LG Funding v. United Senior Services (N.Y. Sup. Ct. 2016)

An earlier case that established the analytical framework later refined in Fleetwood and K9 Bytes. The court focused on whether the MCA funder bore genuine risk that it might not recoup its advance — the core distinction between a purchase (risk borne by the purchaser) and a loan (risk shifted to the borrower).

"These cases have fundamentally changed the MCA landscape. What was once an unregulated industry is now facing real legal accountability — and that accountability creates leverage for business owners."

Why Recharacterization Matters for Your Business

If your MCA is recharacterized as a loan, the consequences are significant — and they overwhelmingly favor the business owner:

• Usury laws apply. Most states cap commercial loan interest rates at 16–25%. MCA effective APRs of 60–400% far exceed these caps. A usurious loan is either void entirely or the lender forfeits the interest and may face penalties.
• Licensing requirements apply. Commercial lenders must be licensed in most states. If the MCA funder is not licensed as a lender in your state, the agreement may be unenforceable.
• Truth-in-lending disclosures apply. Loans require specific disclosures about APR, total cost of borrowing, and repayment terms. MCA agreements typically do not include these disclosures.
• Enhanced protections apply. Recharacterization may trigger protections under state commercial lending statutes, including requirements for good-faith dealing, cure periods before default, and limits on collection practices.

How MercResolution Can Help

MercResolution specializes in analyzing MCA agreements for recharacterization potential and using that analysis as leverage in settlement negotiations. Every case begins with a detailed review of your agreement against the factors courts examine — reconciliation provisions, payment structure, guarantee terms, and repayment obligations.

We negotiate directly with lenders under limited power of attorney, applying the legal framework from Fleetwood, K9 Bytes, and related case law to achieve the best possible resolution. Our clients typically see reductions of 30–50% from their outstanding MCA balances. When court proceedings are necessary, we coordinate with a network of attorneys experienced in MCA recharacterization and usury defense.