Is Your MCA Actually a Loan? 5 Features That Deserve Legal Review

You are right to be skeptical about the semantics in your contract. But courts can look behind the terms to see if this is a true future receivables purchase or a loan. Under New York state and federal law, the emphasis would typically be on the substance of the contract, not just its wording. In deciding whether the transaction is more a receivables purchase than a loan, the key is if you were the one taking the risk that your receivables go uncollected. If you must bear that risk, then courts may hold this to be a loan instead of a future receivables purchase.

If Courts Treat the Transaction as a Loan

The reason this distinction matters a great deal is a sale can take the receivables right out of the bankruptcy estate. But if courts treat the transaction as a loan, the money remains your debt. New York would say that if it’s a loan, any contract with a criminal interest rate of more than 25 percent a year is void. Corporations can’t plead usury in New York unless the interest rate is above 25 percent. That rule is set aside in very large corporate deals of $2,500,000 or more.

And a bankruptcy’s second route for undoing transactions may not require the hard fight to establish usury. Section 548 of the bankruptcy code lets your trustee or you, as debtor, avoid any transfer made within two years of filing for less than a reasonably equivalent value while the debtor was insolvent. That is, just paying the funder more than you received from it may itself show you got no reasonably equivalent value here.

True Factoring

Courts in New York have three things they’d look for to know if a funding company was really buying receivables. The first feature is that the funding company should have a regular ”reconciliation”. The rate at which you make payments should be figured against the amount collected from your customer. The right to reconciliation sounds good at first, but it may be illusory if it isn’t enforced. Watch for terms that let the funding company collect the full price whether or not you collect from your customers. If you can’t make payments, the reconciliation evaporates. Now this is just a promise of credit with a vague right to correct the weekly amount if business gets bad.

The second feature to look for in true factoring is the absence of a ”fixed term”. There may be no single clause setting a date or period. But dividing the balance by your payment would tell you when your part of the payments ends. If you are in fact obliged to keep up payments until you have paid what the contract defines as the full price, then this is probably a loan after all.

Courts have found the third aspect to a true receivables purchase is what happens in case of bankruptcy. If the risk of debtor insolvency rests with the funder, that points toward a sale. If, on the other hand, filing bankruptcy is labeled an event of default, that can count against any claim that this is a sale.

Fourth, the collateral: If the funder has taken an unlimited UCC-1 security interest in all your assets, that tells us again that it expects you to pay the full price either way. Why pretend the funder really bought the value represented by your receivables when it bears no risk that any of your customers fail to pay?

Fifth, the default remedies: It’s no surprise if the funder adds features to protect itself as if you signed a loan agreement. For example, it may expect you to make a confession of judgment. The funder can even debit or sweep your bank accounts for any default and demand its full balance in one shot. All this is more confirmation that this funding company isn’t acting like a buyer.

A 2026 Bankruptcy Court

In one decision (not binding here), a 2026 bankruptcy court held that a funder that paid $350,000 for $543,750 in future receipts had loaned money. It had received daily ACH payments, tied to no particular customer. The funding company had taken a UCC-1 lien on all the company’s assets. It held a personal guaranty and confession of judgment, and the funding company could sweep the company’s bank accounts. The funding company bore no risk that the debtor’s receivables were not collected. The debtor was the party bearing the risk that its receivables went unpaid. The debtor remained liable to pay the full purchase price no matter what happened. That’s a loan, not a receivables purchase. The court called the reconciliation clause arguably “illusory.” Finally, the court found a fixed term. It said that although there was no defined term in the contract, the term was the time to collect back its “purchase” price. The receivables stayed in the bankruptcy estate.

It’s tempting to take the label “receivables purchase” on faith. Other courts may also be skeptical of calling a transaction a sale just because the contract calls it that. If the funder has really borne the risk that your receivables aren’t collected, the funding agreement could pass as a sale of your future receivables. Future receivables funding agreements are complex, and you need to read every word for details that might be inconsistent with this being a sale, and the five features above are where a lawyer should start.