MCA vs. Business Loan: 6 Reasons the Legal Distinction Matters

A merchant cash advance is a purchase of future receivables, with a credit-like sum given up front, and an ongoing, gradual repayment out of sales, not a loan under the law. That means laws written for loans may not protect you the way they do for loans. That’s why a merchant cash advance calls itself an “advance” or “purchase” instead of a loan and a “factor rate” instead of an interest rate. It’s why they’ve sat outside lending regulations and why, even so, the courts keep litigating whether they’re actually loans or not. The devil’s in the details of course, and it varies between states. It comes down to how the contract’s worded and how your state judges read it. Six reasons it matters follow.

First, only loans are subject to usury laws. If a court finds that a specific MCA is a true purchase of receivables, you cannot use usury laws to defend against collections. Usury laws often cap what a lender can charge you. In New York, loans made at more than 25% a year are subject to criminal usury statutes. So far as loans made to them go, corporations are generally barred from raising usury as a defense. They can sometimes raise criminal usury as a defense, though; even for a corporation, a criminally usurious loan is void.

Second, a court might decide that the MCA is a loan. In New York, the court looks at whether there is a real reconciliation clause, whether there is a fixed end date, and whether the funder can collect in case of bankruptcy. In In re Kossoff PLLC, a bankruptcy court in Manhattan ruled on July 27, 2026 that 19 contracts calling for ongoing remittance of receivables were loans under New York law, even though the contracts said they weren’t, saying that the reconciliation clauses were “illusory.” That meant the funder could adjust terms however it wished, without refunding over-collected amounts. If your funder follows the same formula, your reconciliation might also be illusory. If a court decides your MCA is actually a loan, though, that could let you raise usury as a defense. This isn’t a checklist. Two contracts with nearly the same wording can be viewed differently, and it all depends on the state as much as the terms.

The third reason is the reconciliation clause. Think of a reconciliation as a “check” between what you agreed to do and what has actually happened. If for whatever reason your business makes less or the funder collects too much, the reconciliation clause allows the two parties to put things back on the right track. Whether there’s a reconciliation clause matters: it makes a difference whether the funder can readjust payback over time, based on income, or whether the payments are set for the length of the contract. Go through your contract, and you’ll see there’s a lot of room for confusion here.

Standard Disclosure

Fourth, disclosure. Because an MCA isn’t a loan, the funders who offer them have not had to meet strict standards for providing information, and they have not had to make the loan sound as expensive as it is. However, more and more states are putting things back on the rails by requiring a standard disclosure before signing an MCA. How much do you receive? How much does the funder receive? What are the terms? How much are you paying overall? New York’s MCA laws focus on transparency, not price caps. They apply to non-bank funders, making them provide APR-like pricing on deals of $2.5 million or less. These rules don’t make MCAs illegal. APR beats factor rates for comparing one thing to another. In March, 2023 the CFPB announced state disclosure laws in California, New York, Utah and Virginia are not preempted by federal Truth in Lending Act, since the states laws cover commercial finance and federal law covers consumer credit. New disclosures could show up on newer advances. While some states make the funder register, Florida has a specific disclosure law in sections 559.961 to 559.9615 of its statutes. Whether it applies to you depends on thresholds and exemptions in the law.

Fifth, watch for a confession of judgment. A confession of judgment clause waives in advance the business’ rights to contest a judgment. It can allow a funder to get a judgment by default, that is, without a trial. New York tightened things in 2019. A confession of judgment can only be filed in a New York county where you lived at signing or live now. Also, only government agencies can use NY courts against a debtor living out of the state. That used to be allowed for private collectors too. The advance itself usually doesn’t report to the credit bureaus. That’s usually why they don’t show on your credit, but a judgment does, since court records are public.

Sixth, the funder might grab payment before you realize what happened. The funder usually takes repayments automatically from your bank account under the agreement. Also, it may file a UCC lien in public claiming a stake in all your business assets, and as long as it remains, it can block other financing. Under Texas HB 700, if the provider wants to set up automatic debits, the funder must have a perfected interest in the bank account that comes ahead of all other claims. A personal guarantee can make you personally liable in ways the business structure otherwise wouldn’t. What the funder can do after a default, including beyond automatic collection, depends on the contract. In April 2021, MCA provider Yellowstone Capital and related defendants agreed to pay $9.8 million to settle FTC charges they misled small businesses and kept withdrawing money after businesses had paid in full.

What if you’re already in the middle of an MCA? First, find the reconciliation clause and check how it works. Is your funder’s clause “illusory,” that is, can the funder adjust payment terms however they like? If there’s an estimated APR, compare deals on the APRs, not the factor rates. Watch if the funder tries to collect amounts you don’t owe, collects too much, treats the agreement differently than the terms require, or contacts you in unfair ways. Those are all matters for a lawyer.