Merchant cash advance (MCA) debt can be a significant burden for a New York business. In New York, courts use a three-factor test to determine if a transaction is a true purchase of future sales or a disguised loan. If a judge finds the agreement is actually a loan and meets the threshold for criminal usury, the consequences for the funder can be severe.
Understanding the New York three-factor test
While a UCC-1 filing is a standard notice of a funder’s interest in your assets, New York law focuses on the underlying contract. Judges perform a holistic review of the agreement to see if the funder is truly sharing in your business risk. Factors that New York courts weigh when identifying a disguised loan include:
- Lack of reconciliation: The contract does not allow you to adjust payments when your sales revenue declines.
- Definite term: The agreement sets a fixed date by which the entire amount must be paid back.
- No risk of loss: The agreement requires you to repay the funder even if your business fails through no fault of your own.
- Absolute guarantees: The personal guarantee is not a “bad boy” guarantee triggered by misconduct, but a requirement to pay regardless of sales performance.
If these factors suggest the funder shifted all risk onto you, a New York court may classify the transaction as a loan. If the interest rate exceeds 25%, it may be considered criminally usurious, which can lead to the debt being declared void.
Strategies to handle aggressive collection
If you are a New York contractor, trucker or restaurant owner facing aggressive collection, you have options. Review your contract for reconciliation language.
If your revenue has dropped, you can demand an adjustment. If a funder refuses to release a lien after you have satisfied your obligations, you may need to file a formal statement with the state to publicly note that their claim is wrongful or inaccurate.
Protect your business with a legal review
Because these contracts are complex and the consequences of default are high, you should consider seeking professional legal help to review your specific agreement. An attorney can help you determine if your contract meets the criteria for a loan and protect your business from predatory tactics.