MCA Funders as Critical Vendors: 5 Reasons They Never Qualify

The Bankruptcy Code contains no section titled "critical vendors," and the reasons courts give for letting a debtor pay certain prepetition suppliers in full describe a supplier, which a merchant cash advance funder is not. A funder that asks to be treated as critical is asking to be paid ahead of everyone else for having lent money, or bought receivables, before the case began. The Seventh Circuit's word for payments of that kind was "preferential."

What follows explains why the argument fails on its own terms. The leading appellate decision comes from the Seventh Circuit, and other courts approach critical vendor motions differently, so "never" here means something specific: none of the grounds on which such payments have been justified fits a party whose only product is cash.

1. A Funder Supplies Nothing the Business Needs to Open Tomorrow

In February 2004, the Seventh Circuit reviewed a first-day order that let Kmart pay "in full, the pre-petition claims of all 'critical vendors.'" Writing for the court in In re Kmart Corp., Judge Easterbrook held that a debtor seeking such relief "must prove, and not just allege," among other things, "that, but for immediate full payment, vendors would cease dealing." The premise is a supplier whose refusal to ship would stop the business: the only distributor of a replacement part, the carrier that moves the product, the wholesaler with the inventory already on its truck.

A funder's continued dealing with a debtor means more daily debits. It ships no goods and performs no service the business requires to serve its next customer. When a funder stops dealing, the business loses a withdrawal from its account, which is the opposite of the harm the critical vendor theory exists to prevent. Treating a funder as a critical vendor resembles listing the tow company that hauled away a delivery van as the van's mechanic, because both, after all, have had their hands on the vehicle.

The Code's own priority for suppliers makes the same distinction. Section 503(b)(9) grants administrative expense status for "the value of any goods received by the debtor within 20 days before the date of commencement of a case," where the goods "have been sold to the debtor in the ordinary course of such debtor's business." Section 546(c) gives a similar seller a limited right to reclaim goods. Both provisions speak of goods. Neither speaks of services, and neither speaks of money advanced against future receipts, whatever the funder calls the transaction.

The funder's paperwork, if anything, confirms the point. An agreement that describes the funder as a buyer of receivables describes a party that takes value out of the business, not one that puts inventory in. The Orlando bankruptcy court, confirming a Subchapter V plan over two funders' objections in October 2025, held that neither funder owned or held a security interest in the debtor's postpetition receivables at all.

2. The Doctrine of Necessity Does Not Supply the Power

The arguments for the Kmart order drew on section 105(a), which lets a court "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title," and on a judge-made "doctrine of necessity." The Seventh Circuit rejected both. "A 'doctrine of necessity' is just a fancy name for a power to depart from the Code," the court wrote. It treated section 363(b)(1), which permits use of estate property outside the ordinary course after notice and a hearing, as "more promising," and it still required proof.

Courts outside the Seventh Circuit have not all followed Kmart, and some continue to approve critical vendor payments on other reasoning. None of that reasoning turns a lender into a supplier.

3. Payment Must Leave Other Creditors Better Off, and Paying a Funder Cannot

The Kmart court put the test in one sentence: "preferential payments to a class of creditors are proper only if the record shows the prospect of benefit to the other creditors." A critical vendor payment is justified, when it is justified, because the vendor's continued supply produces more value for the estate than the payment costs.

Consider, hypothetically, a company with $300,000 available for general unsecured creditors and $1,000,000 of such claims, one of them a $100,000 merchant cash advance balance. Paid in full, the funder takes a third of the pool, and the remaining creditors divide $200,000 among $900,000 of claims. Nothing flows back. The funder's continued "dealing" would consist of collecting, and a debtor that needs new money after filing has a different statute to use.

Whether a court could ever find a benefit to other creditors in paying a funder whose agreement required nothing of it after the advance is a question worth holding, and one the record in any case would have to answer with evidence rather than with the funder's description of itself.

4. New Money After Filing Is a Section 364 Question

A funder sometimes offers something that sounds like continued supply: a fresh advance after the petition, if the old balance is taken care of. That offer is postpetition credit, and section 364 governs it. Unsecured credit outside the ordinary course needs court approval after notice and a hearing under 364(b); credit with priority over administrative expenses or a lien on estate property is available under 364(c) only if unsecured credit cannot be obtained; and a lien equal or senior to existing liens under 364(d) requires that the debtor be "unable to obtain such credit otherwise" and that existing lienholders be adequately protected. Bankruptcy Rule 4001(c) limits interim credit to what is needed "to avoid immediate and irreparable harm to the estate pending a final hearing."

The rule that runs through all of this is that a creditor who wants better treatment inside the case must earn it in the open, with notice to everyone it would displace.

But even a properly approved postpetition advance buys the funder a postpetition claim. It does not convert the prepetition balance into a critical vendor claim, and a funder that conditions new money on repayment of old debt is describing a financing term that the court, not the funder, will evaluate.

5. The First Twenty-One Days, and the Debits That Keep Running

Bankruptcy Rule 6003 bars a court, within 21 days after the petition, from granting a motion "to pay all or a part of a claim that arose before the petition was filed" unless relief "is needed to avoid immediate and irreparable harm." Meanwhile, a debit taken on a prepetition advance after filing is an act to collect a prepetition claim under section 362(a)(6), and a postpetition transfer of estate property "not authorized under this title or by the court" is avoidable under section 549(a). The Orlando court noted that in its region, the U.S. Trustee's guidelines require a chapter 11 debtor to close prepetition accounts and open debtor in possession accounts. The ACH authorization points at an account that is no longer there.

Where a Funder Belongs in the Case

A funder belongs in the claims register, where its claim can be tested, and sometimes in an adversary proceeding, where its transfers can be. Delancey Street negotiates merchant cash advance debt and does not appear in bankruptcy court; it is a settlement firm and not a law firm, and a business planning a chapter 11 filing, especially one that depends on postpetition financing, needs chapter 11 counsel to structure first-day motions and any credit under section 364. Before a filing, Delancey Street reviews the agreements, bank activity and UCC filings without charge or obligation and coordinates with independently licensed attorneys when a negotiated resolution is not the right path. Critical vendor orders exist because some creditors keep a business alive by continuing to supply it. A funder's agreement was written to keep collecting from it.