Merchant Cash Advance Disputes: 6 Questions About Arbitration and Lawsuits

Many entrepreneurs rush to sign a loan or business advance contract without reading the fine print. But the contract controls whether you go to arbitration or end up in a lawsuit. Its dispute sections explain how a dispute arising out of the contract will be dealt with, by either the court system or in an arbitral proceeding. The section will also explain what jurisdiction and what specific law governs the agreement. The court system you’re suing or being sued in may not be the one you are familiar with or the system that offers the most advantages. These kinds of clauses should be assessed by an attorney to determine what law applies and whether the arbitration, forum or governing law provision can be challenged.

Who decides whether your contract is a legal or illegal loan - the arbitration panel or the courts? The U.S. Supreme Court made clear: if you don’t attack the arbitration clause itself, your argument that the whole contract is an illegal, usurious loan is not for a judge to decide; that decision belongs to an arbitrator.

Whether the Advance Contract Is a Loan

The central question in a merchant cash advance lawsuit is often whether the advance contract is a loan. The New York appeals court in 2020 held that an MCA was not a loan unless repayment was absolutely required; it weighed whether the MCA ever calls for reconciliation; whether it has a finite term; whether it has recourse if the merchant goes bankrupt and can’t pay. In that 2020 case, the court threw out the business’s criminal usury counterclaim but let the usury defenses go forward, since the funder-controlled reconciliation clause, bankruptcy default, guaranty and confession of judgment suggested repayment might be absolute, and thus possibly a loan.

The appellate majority in Bridge Funding Cap LLC v. SimonExpress Pizza, LLC (2025) saw an MCA as a receivables purchase, yet it reversed the funder’s judgment because its evidence on damages conflicted. Whether an MCA is a loan and whether the MCA holder can prove the correct amount owed are separate issues. That case doesn’t necessarily set the test for every state. The legal test in your case will depend on the governing jurisdiction. Analyze the full agreement and any amendments; examine the deal’s revenue assumptions and withdrawal history; check if you asked for a change in collections. Keep proof of everything you sent and the funder’s response.

It is worth searching the contract for any personal guarantee. Find out who signed it; whether it’s limited to misconduct or basic contract performance, or whether it’s much broader. Having a guaranty doesn’t necessarily mean the whole deal is a loan.

The fact that a merchant cash advance has a high factor rate does not by itself make it usurious. A factor rate is just a dollar relationship, not an annual interest rate; an MCA with a $50,000 advance and a factor of 1.40 represents $70,000 in purchased receivables. The 1.40 factor doesn’t mean the merchant will pay an APR of 40%. The annualized cost doesn’t depend just on the factor rate. It also depends on the timing, payment frequency, deductions, fees, and money actually received. You can compare net funds received with total payments and collection period. Early payoff may not cut the cost unless the documents clearly state this. There’s a lot more to proving a usury claim than finding a high annual percentage rate. Counsel must look into whether the usury statute applies to the transaction in question, which charges count toward usury, whether an exemption might apply, and what remedies may be available.

Confessions of Judgment

Under 2019 legislative reforms, New York State restricted confessions of judgment. Since Aug. 30, 2019, such confessions are only allowed for residents in a county where the debtor has a residence in NY or if the business debtor has a place of business in NY. As a result, funders cannot use them to get judgment against out-of-state debtors. In Texas, HB 700, which takes effect for contracts entered into on or after September 1, 2025, states that any commercial sales-based financing contract with a confession-of-judgment clause is void and unenforceable.

Having a lawful business structure doesn’t excuse unlawful sales or collection practices. In 2022, the FTC banned one company and its co-owner from the merchant cash advance industry, after allegations of misleading terms, undisclosed deductions, abusive collection, and improper confessions of judgment. One regulatory case doesn’t decide your dispute.

Organize Your Records

Document any differences between funding offer and final amount received. Note any disputed withdrawals, or any reconciliation requests that were ignored. Did the funder keep using a different balance than you did? Did they threaten personal liability or liens? These are issues for counsel to investigate, not automatic proof of wrongdoing.

If you’re unhappy with the results of arbitration, you’re not entirely stuck with them: the Federal Arbitration Act gives you a limited time after the award is issued to ask a court to vacate, modify, or correct it. Section 12 of the Act gives you only three months after an award is filed or delivered to serve notice of a motion to vacate, modify or correct the award.

Evidence is the key to determining liability or amount owed, whether the dispute is handled by litigation or arbitration. The best way to organize your records is to keep everything in one file:

• the whole agreement you signed, including its amendments, any guarantees;
• proof of the funding, and of any deductions or withdrawals;
• bank statements and sales records;
• and all reconciliation requests and collection messages, with a timeline including dates of each event;
• and every summons, complaint or judgment.

If you’re considering a merchant cash advance, ask up front for a clear explanation of every payment adjustment, all fees and charges, how to do an early payoff, what events trigger default, whether anyone is guaranteeing the agreement, and whether there’s a confession-of-judgment clause.

Don’t impulsively block withdrawals, take other action or change accounts, which can create more disputes. Instead, ask for legal review to see if a defense, reconciliation request or grounds to negotiate exist. An offer of settlement or restructured payments may be more realistic, even if enforcement is technically possible.