How Courts Examine MCAs as Possible Usurious Loans: 5 Questions Behind Recharacterization

Courts deciding whether a merchant cash advance contract is a loan often look beyond its name (that is, a “purchase” of future receipts) and try to nail down whether the financier has an absolute right to repayment or runs a substantial risk of nonpayment. Courts look at the contract as a whole. Courts have said they apply several factors. The one consistent one is the degree of repayment risk the funder takes. Other factors they say they consider include whether there is real reconciliation, a fixed end date, bankruptcy recourse, and a personal guarantee. But is it illegal? It might be usury or a violation of state lending laws, but more will be needed to show that.

A first question is how the MCA structure relates to the risk. If the merchant’s sales drop for ordinary reasons, do payments and collection period adjust? Or does the merchant really need to pay the full amount on the same schedule? Calling it a receivables purchase agreement doesn’t settle the question of risk. A New York court in LG Funding looked at substance, not just form.

A second question is whether there is reconciliation. What happens when sales are lower than expected? The merchant might say, “Recalculate the amounts according to our new sales figures.” So the real question is: Must the funder adjust when the merchant qualifies, or may it refuse at its sole discretion? If the funder has discretion to deny an adjustment, then there may be no real risk of nonpayment. The contract in L.G. Funding gave the financier the sole discretion to adjust terms when sales fall, and also treated bankruptcy as an event of default. The court noted these points in allowing the merchant’s usury defense to proceed.

The third question is whether there is a date for final repayment. If it is a fixed date, that suggests a loan. If it adjusts with the declining cash flow, that can support a non-loan argument. Principis Capital v. I Do: The agreement had an indefinite term, adjustable payments. The court said that all considered, it was a receivable purchase, not a loan.

Fourth, an automatic acceleration of payment after the merchant files for bankruptcy can suggest that the funder has a loan. One provision sometimes used is a clause with bankruptcy as a “default” that allows the whole payment to come due. Likewise, a clause that makes the owner or a guarantor immediately liable for the unpaid balance upon bankruptcy, can be a red flag to a court. Courts have regarded such clauses as other loan features to consider. Courts say they weigh these factors together and do not treat them as a scorecard.

Kapitus Servicing v. Suburban Waste Services (2026) was a fact-specific case where the court found mixed signals. It noted that although the financier had recourse in the event of bankruptcy, the contract had no fixed repayment date, which pointed to the possibility of contingent repayment. It also found that the contract left open whether the merchant had a right to request reconciliation. The court decided not to declare the contract a loan as a matter of law but instead to leave the question open. Crystal Springs Capital, on the other hand, involved a $90,000 cash advance for $140,000 in future receivables. The contract provided for daily debits to the merchant’s bank account with no duty to reconcile, and in the event of default or bankruptcy, the entire amount became immediately due. The court found these factors combined to be evidence of a criminally usurious loan.

Personal Guarantees

Does a guarantor have an unlimited duty to repay the whole amount without any adjustment? The agreement might trigger the guaranty on non-performance or breach, but not commit to 100% repayment at all times. Courts have said that personal guarantees are not conclusive and should be looked at along with other features. In Principis Capital v. I Do, the court found the agreement was not a loan, even though it had a performance guarantee. In Phantom Advance v. Top House Properties, a trial court in New York looked at a provision that made the guarantee apply if there was a bankruptcy or insolvency, and since the contract also gave the funder sole discretion to choose whether to adjust payments, it found the agreement to be a loan.

Closing the Business

Even if you close the business, you may still owe what you promised to pay. Closing the business doesn’t automatically give you a free pass to break a contract or absolve you of a personal guarantee. The reason you shut down may be crucial.