MCA Debt: 7 Facts About How It Differs From a Loan

MCA debt is a debt the contract insists does not exist. The agreement calls it a sale, the funder calls it a purchase, the merchant calls it a loan, and a court asked to choose will read the paper for features rather than names, which is why the owner who understands those features is better placed than the one who knows only the balance.

Seven facts separate it from a loan. Several of them change what happens when the business cannot pay.

1. The Business Sold Something, at Least on Paper

In the agreement at issue in LG Funding, LLC v. United Senior Properties of Olathe, LLC, the merchant "sold and the plaintiff purchased United's future receivables for the sum of $100,990," in exchange for a purchased amount of $129,267.20. The ratio between those two figures, about 1.28, is what the industry calls a factor rate, though the opinion never uses the term. The merchant did not borrow $100,990. It promised to deliver $129,267.20 of receipts as they arrived.

That framing is the source of every difference that follows.

2. The Payment Is Supposed to Move With Revenue

A loan payment is a fixed obligation. An MCA remittance is described as a share of receipts, and the daily figure is presented as an estimate of that share. In Bridge Funding Cap LLC v. SimonExpress Pizza, LLC, the merchants agreed to deliver 25 percent of future revenues until a purchased amount was paid, and the contract let the daily remittance be modified, retroactively and going forward, on request and with proof of revenue. The Fourth Department's majority held in July 2025 that the agreement was a purchase as a matter of law, because those provisions were real rather than illusory.

A concurring justice would have asked a harder question: whether reconciliation works in practice, or whether a funder keeps requesting documents while it keeps debiting. That view did not carry the majority. It names, all the same, the thing a merchant should test before relying on the clause, and it is the fact about MCA debt that owners tend to learn last.

3. There Is No Maturity Date

A loan ends on a date. A true receivables purchase ends when the purchased amount has been delivered, however long that takes, and if sales slow the collection period stretches. New York courts treat the presence or absence of a finite term as one of three factors in deciding which kind of transaction they are looking at.

4. Usury Law Applies Only if a Court Says It Is a Loan

Usury statutes regulate interest on loans. A purchase has no interest, so an MCA that is a genuine purchase sits outside them. That is the structural reason the contract works so hard to be a sale.

In New York the stakes are specific. General Obligations Law 5-521 bars a corporation from raising the defense of usury, with one exception: a corporation may still assert criminal usury as defined in Penal Law 190.40, which makes it a class E felony knowingly to take interest on a loan "at a rate exceeding twenty-five per centum per annum." In LG Funding, the Second Department allowed a merchant to pursue that defense where the funder could adjust payments only "at [its] sole discretion," because the court could not say on the papers that repayment was contingent rather than absolute. It did not declare the advance usurious; it said the question deserved a trial.

The federal courts have gone further in at least one case. In a June 2023 summary order in Fleetwood Services, LLC v. Richmond Capital Group LLC, the Second Circuit affirmed a judgment for a merchant after concluding that the agreement there, with reconciliation at the funder's sole discretion, a finite term, and recourse against guarantors on bankruptcy, was in substance a usurious loan, and it upheld civil RICO damages for the collection of unlawful debt. Summary orders carry no precedential weight in that circuit, and the result turned on that contract's terms.

The same stream of daily debits can be a lawful purchase in one courtroom and an unlawful loan in another, and the difference is a handful of sentences the merchant signed without reading.

Courts have ruled both ways, and the direction depends on the clauses. There are merchants for whom recharacterization is a real defense, though the ones who benefit tend to have kept every bank statement.

5. The Funder May Hold a Judgment Before Any Lawsuit

An MCA agreement may be paired with a confession of judgment, an affidavit by which the merchant authorizes entry of judgment for a stated sum. New York's CPLR 3218 now limits filing to the county where the defendant resided when it signed or at filing, and a business resides in any county where it has a place of business, a rule that since August 2019 has kept New York clerks from entering confessions against out-of-state merchants. Texas declares confession provisions in covered commercial sales-based financing contracts void and unenforceable.

But any creditor can obtain a judgment eventually. A creditor without a signed confession has to sue for it first.

6. The Collateral Is the Receivables Themselves

A funder that purchased receivables, or took a security interest in them, may notify the merchant's customers. Under UCC 9-406, once a customer receives an authenticated notice that the amount it owes has been assigned and must be paid to the assignee, paying the merchant no longer discharges the customer's obligation, though the customer may demand reasonable proof of the assignment. For a business whose customers pay by invoice, this is the difference between a creditor that waits and a creditor that stands between the business and its revenue.

7. The Owner's Guaranty Covers Conduct, as Drafted

In both LG Funding and Bridge Funding, the owners signed personal guaranties of the merchant's performance of its representations and covenants rather than a plain promise to pay. In Bridge Funding the majority treated the guaranty claim as dependent on the success of the breach of contract claim against the business. What that means for a particular owner depends on the words of the guaranty, and on whether the business breached a covenant (by stacking another advance, or closing an account) or only earned less.

What the Differences Mean for the Balance

Each of these facts is also a point of negotiation, and the owner who can name them reads a funder's demand letter differently. Delancey Street works on that side of MCA debt as a negotiator, not a law firm, with an MCA focus and a no-cost confidential review of the contracts and bank history; legal questions such as recharacterization go to independently licensed counsel. The review starts at Delancey Street.

A loan has a balance. MCA debt has a balance and an argument about what the balance is, and the argument is sometimes worth more than the discount.