Merchant cash advances are legal. They’re also, on their face, not loans, and that distinction isn’t a technicality. It’s the foundation the entire industry is built on, and it’s the crack that competent settlement work drives a wedge into.
The structure, and why it exists
An MCA is documented as the purchase of a percentage of your future receivables. The funder doesn’t lend you $100,000 at an interest rate. The funder buys, say, $140,000 of your future credit card and bank deposits for a purchase price of $100,000 today, and collects that $140,000 by taking an agreed slice of your daily or weekly receipts.
There’s no stated interest rate anywhere in the document. There’s a factor rate, which is just the multiple: 1.40 in that example. And because there’s no interest rate, the argument goes, there’s no usury limit to violate, no lending license required, and no truth-in-lending disclosure owed to you.
That $100,000 for $140,000 deal, collected over six months of daily debits, works out to an effective annual cost well north of 100%. In many states, a loan at that rate would be criminally usurious. Structured as a purchase, it’s a Tuesday.
What makes a purchase a purchase
Courts have been sorting this out for years, and the analysis keeps landing on the same handful of questions. A genuine purchase of receivables involves the funder actually taking risk. A loan involves repayment that’s certain. So judges look for whether the risk is real.
- Is there a reconciliation provision, and does it work? If your revenue drops, does the payment drop with it? A real purchase of a percentage of receipts must flex when receipts flex. A fixed daily payment that never moves looks like debt service, not a revenue share.
- Is there a fixed term? Genuine receivable purchases have no maturity date, because nobody knows when your receivables will materialize. A schedule that pays out in exactly 180 business days regardless of your sales is a repayment schedule.
- What happens if your business fails through no fault of your own? If a slow season or a lost customer counts as a default, the funder hasn’t accepted the risk it claims to have bought.
- Is there a personal guarantee, and how broad is it? Guarantees that cover performance rather than fraud start to look like guarantees of repayment, which is a loan feature.
When those factors point the wrong way, a court can recharacterize the transaction as a loan. And once it’s a loan, everything the structure was designed to avoid comes back: state usury caps, licensing requirements, and in extreme cases the loss of the right to collect the interest at all.
Why this matters to you specifically
You’re probably not going to litigate this to a published opinion. Almost nobody does. That isn’t the point.
The point is that your funder’s lawyer knows the same case law, and knows which parts of your agreement are exposed. When a settlement demand arrives with those specific weaknesses identified and cited, the conversation changes character. It stops being a collector asking when you can pay and becomes two parties pricing legal risk. That’s where discounts come from.
If your funder debited you the exact same amount every single business day through a month when your revenue was down 40%, and the contract contains a reconciliation clause, they handed you something valuable. Don’t throw the bank statements away.
People of the State of New York v. Yellowstone Capital LLC et al. (N.Y. Sup. Ct. 2025). The Attorney General secured a $1.065 billion judgment against Yellowstone and 25 affiliated entities, the court finding that advances with fixed daily payments, short 60 to 90 day terms, and no meaningful reconciliation are loans rather than purchases of receivables, and therefore subject to New York’s criminal usury statute (N.Y. Penal Law §190.40, 25 percent). Outstanding debts were cancelled for more than 18,000 businesses nationwide.
Where the law is heading
Several states now require commercial financing disclosures that force funders to show APR-style numbers at origination. California and New York led; others have followed. Read carefully what that does and doesn’t accomplish. It’s a disclosure regime, not a rate cap. Nothing about it makes a triple-digit effective cost illegal. It just means the number appears on the paper before you sign.
The federal picture has been quieter than the industry expected, with enforcement focused on outright deception rather than the underlying structure. Don’t plan around a rescue from Washington. Plan around the contract you actually signed.
The short version
- MCAs are legal and the purchase structure is generally respected when the funder genuinely bears risk.
- When the deal has a fixed term, a payment that never flexes, and a broad personal guarantee, the purchase label gets weaker.
- A weak purchase label is leverage in settlement, whether or not you ever see a courtroom.
- You can’t use leverage you haven’t identified. Someone has to read the documents.
Getting out of an MCA is not a DIY project. The funders have lawyers. The contracts have confessions of judgment. Someone has to read your agreements, line by line. Our #1-rated firm does that on a free call. No upfront fees.