A merchant cash advance (MCA) gives your business funds in exchange for future receivables. If frequent payments strain your cash flow, you may wonder why loan rules do not always apply.
The key difference is that a true MCA is a purchase, not a loan. Since the provider takes on some risk tied to your future sales, the same lending and usury rules do not automatically apply. That does not leave MCAs entirely unregulated. In New York, the state still requires standardized disclosures for certain commercial financing transactions of $2.5 million or less.
How does a true MCA differ from a loan?
When you take out a loan, you agree to repay borrowed funds. Your duty to repay remains in place even if your business earns less revenue than expected.
A true MCA works differently. The provider purchases part of your future receivables and accepts the risk that those receivables may fall short. If the agreement lets you lower payments when your revenue drops, that may help show that repayment depends on how much your business earns. That may matter when a court decides how to classify the transaction.
New York courts examine the repayment terms
New York courts look beyond the contract title and examine whether the provider has an absolute right to repayment. They commonly weigh three factors when making that decision:
- Reconciliation: Does the agreement let you adjust payments to reflect changes in your actual revenue?
- Term: Does the agreement have an indefinite term rather than a fixed repayment period?
- Bankruptcy: Does your bankruptcy give the provider recourse or trigger a default?
No single factor controls the result. A court weighs all three factors when deciding whether the deal is an MCA or a loan.
If a court classifies the transaction as a loan, New York usury rules could become relevant. Corporate borrowers generally cannot raise civil usury as a defense, but they may raise criminal usury when a covered loan charges more than 25% annual interest. Genuine purchases of receivables fall outside usury laws since they are not loans.
Focus on how repayment works
Dense MCA terms might make a dispute harder to understand. Consider reviewing how your payments change when revenue falls and what triggers a default. Keeping the contract and payment records together could help you focus on the terms that matter most as you prepare for the legal process.