MCA Funders Accept Less
Any funder that takes less than a full balance is doing so because it expects a possible benefit. It could be afraid a lawsuit will cost too much, it could be aware the contract terms may be flawed. Whether or not the funder accepts less often depends on the advance’s contract terms, its actions before and during the settlement, how the merchant’s finances, defenses, litigation risk, and other options compare with the funder’s. Every situation is different; every funder has different motives.
One risk is a court that will turn the advance into a loan. Courts analyze the contracts to decide whether they are disguised loans. The courts in New York usually look at whether reconciliation was required, if the term was fixed and how the contract would treat bankruptcy. No single factor usually wins the case. In LG Funding v. United Senior Properties of Olathe, 2020, a New York appeals court denied the funder summary judgment because the reconciliation clause may have been illusory and it counted bankruptcy as a default, so the merchant’s criminal usury defense went forward.
In January 2025 the New York Attorney General secured a settlement worth about $1 billion with Yellowstone Capital and affiliates over alleged high-interest loans disguised as MCAs. Yellowstone agreed to cancel about $534 million in merchant debts. When confronted with onerous litigation the funder may need to settle. So, if the merchant wants to negotiate, it must have cards to play.
How a funder handled reconciliation can affect its standing. Did the advance have a reconciliation clause? Is it meaningful or illusory? Did the funder follow it? Whether it is a true reconciliation clause, and whether the funder actually honored the process, are points a merchant may bring to the negotiation table.
A confession of judgment may allow a funder to get a judgment without suing, but it may have defects, or face a challenge, that makes it less useful. If the merchant can challenge it or otherwise expose its flaws, a funder has one fewer card to play.
The prospect of a bankruptcy changes the playing field. The funder will need to think about what happens if the merchant files. Once the bankruptcy is filed, the automatic stay takes effect and stops collection efforts on the debt. Subchapter V is a streamlined form of chapter 11 designed for small businesses. It has a debt limit of $3,424,000. Lawmakers have passed an act raising that to $7.5 million, but the President had not signed it as of October 1, 2026.
A funder’s first offer may not be its last. If you have several advances, settling with only one won’t necessarily solve the problem.
Some documents for an out of court settlement may not actually settle the dispute but instead reset how payments are made. A funder’s offer to reduce payments or take the obligation down may just be a repackaging, not a true settlement. The labels the parties put on the document usually do not control how the agreement works.
The funder’s offer of less than the full amount will likely arrive in a document its lawyers drafted to protect it. Read before signing; there may be conditions attached, such as a general release, renewed confession of judgment, reaffirmed personal guarantee, or other obstacles. A general release may sign away claims before anyone knows about them or their worth. A new signed guarantee can strengthen the funder’s position.
Watch for a clause saying you acknowledge that your MCA was not a loan, but a sale of receivables. That may take away your argument that the MCA was really a loan. Also, demand the funder agree in writing to remove its UCC lien (a UCC-3 form) once the last payment clears.
The deal may have a catch: if you miss just one payment of the amount you promised to pay, the entire remaining balance you still owe becomes due immediately. It is critical to have a notice and cure period. This gives you a chance to correct a misstep and avoid the funder taking full advantage of the slipup. Beware of terms attached to your agreement that remain after the check clears.
If your creditor cancels a debt, you generally must include it as income in your return, unless you qualify for one of the exceptions, such as insolvency. An applicable lender must file a Form 1099-C if it canceled $600 or more of your debt. If you were insolvent at the time, you can claim an insolvency exception on Form 982. You may get that benefit if you owed more than what you had in assets right before the cancellation.
A low payoff can make future cashflow less a burden, but beware of hidden provisions. The funder’s offer may expire in 48 hours, but that should not be your deadline. The consequences of the agreement you sign outlast any deadline. Make sure you know what you are giving up before you sign.