5 Signs Your MCA Is A Disguised Loan

The hallmarks of an MCA found to be a loan are:

1. daily or weekly payments that did not change despite declines in the merchant’s sales;
2. a “reconciliation” right that the funder was not obligated to honor;
3. a definable term to the MCA;
4. recourse in the event of a bankruptcy or closure of the business; and
5. a personal guaranty triggered by missed payments.

Most MCA contracts choose New York law. New York courts ask whether the funder is “absolutely entitled to repayment under all circumstances,” looking to the agreement’s reconciliation provisions, term and recourse in the event of bankruptcy. LG Funding, LLC v United Senior Properties of Olathe, LLC (2d Dept 2020). For a full review of the doctrine, see our article on whether a merchant cash advance is a loan or a purchase of receivables.

What are the signs your MCA is a loan?

Does your payment actually change when your sales change?

The most obvious sign of an MCA acting like a loan is if the daily or weekly debit remains flat despite a decrease in deposits. The First Department’s February 2026 ruling in People v Richmond Capital invalidated over 3,000 MCAs, finding that the “daily payments were fixed and did not represent a good faith estimate of receivables.” Even with a specified percentage, as in LG Funding, compare the actual debit against your monthly deposits times that percentage.

Does the funder have to honor a request for reconciliation?

In Fleetwood (2d Cir 2023), the Second Circuit found a right to reconcile at the funder’s “sole discretion” illusory. By contrast, in Global Energy (Bankr. D. Md. 2025), the funder prevailed partly because the contracts said it “shall” reconcile once the merchant documented its sales. Even mandatory reconciliation has been found illusory where the funder failed to reconcile monthly as the contract provided and denied the merchant’s requests (Richmond Capital, supra). In Crosby Marine, the court found the right illusory because, even though the merchant could request one at any time and the funder had five business days to respond, the total owed never decreased. Check whether reconciliation depends on documentation satisfactory to the funder and whether it is barred while you are “in default.” Save any email refusing a reconciliation request.

Can you calculate the end date of your MCA?

Divide the purchase amount by the fixed debit amount. “A fixed term is typical of a loan,” and Crosby Marine found the Freedom Funding contracts to be loans: a $100,000 advance would be repaid with $150,000, and at a hypothetical $1,500 daily debit (the opinion does not specify one), the “purchase” would be completed in 100 business days, or approximately 20 weeks. By contrast, in Principis Capital, the funder prevailed because monthly payments adjusted with sales, so the term “was not finite.”

What happens if the business closes or files for bankruptcy?

A funder that requires immediate repayment if you fail is not risking non-payment from lack of receivables. In LG Funding, the agreement made bankruptcy an event of default that required “immediate full repayment” while in Principis there was no such provision. Richmond Capital treated interrupting or suspending the business as a breach. In Davis, two or three rejected debits would have required full repayment. In Crosby, one missed sweep could accelerate the entire balance without notice. A UCC filing alone proves little, since UCC Article 9 also covers sales of accounts (UCC § 9-109), but a blanket lien on all equipment, inventory and accounts, as in Crosby, is “indicative of a loan.”

Is there a guaranty of performance, and for what events?

While LG Funding and Principis both involved a “personal guaranty of performance,” only the former could be enforced upon a bankruptcy. Guaranties are indicative of a loan “when they are not limited by the purportedly contingent nature of the merchant’s obligation,” according to the Second Circuit. In Greenwich Retail, the guaranty covered any “Material Breach,” and the merchant arguably breached on signing by representing that no other MCAs existed, an issue if you have taken more than one. A guaranty limited to diverting receivables, changing bank accounts, or fraud may be a true guaranty of performance; one covering missed payments, closure or bankruptcy is a personal guaranty of repayment.

If several of these apply, the court turns to rates. New York’s criminal usury law, Penal Law § 190.40, bars rates over 25% per year, and under Gen. Oblig. Law § 5-521 it is the only usury defense most businesses have; see our page on whether a merchant cash advance can be usurious.

Common questions on whether a merchant cash advance is a loan

My contract states that I’m paying a percentage of my sales. Can it still be a loan?

Yes. In LG Funding, the agreement required payments equal to 15% of daily revenue up to $2,499 per week, but the court refused to treat it as a sale because reconciliation was discretionary and bankruptcy required full payment.

How many of these bad signs do I need?

Courts have said the factors are “only a guide” and a court “need not find the presence of all three.” They can find a contract is really a loan despite one going against it, because the question is who takes the risk if receivables are not collected.

Does filing a UCC-1 mean my MCA is really a loan?

Not necessarily. UCC Article 9 applies to sales of accounts. But they will look at what is included, and a blanket lien on all accounts is indicative of a loan.

What if I never asked for a reconciliation?

That may hurt your case. In Global Energy, where the funder won, the Trustee did not allege that a reconciliation was ever requested or refused. If you think your debits exceed what your sales justify, ask for a reconciliation in writing and keep any they send.