If your business defaults on a cash advance, the funder can sue the business for breach of contract and sue you for breach of the personal guaranty. A lawsuit is a civil action where a plaintiff seeks money. It starts with a complaint, and if the defendant answers on time, the case proceeds.
What does it mean when a merchant cash advance company says it will sue me?
A cash advance funder can sue you, confess judgment against you, or send your case to arbitration.
- A lawsuit. The funder has you served with a summons and complaint. In New York, if you were personally served, you have twenty days to answer under CPLR 320(a), and Pennsylvania also gives you twenty days under Pa.R.C.P. 1026(a). The stages that follow are covered in what happens when an MCA files a lawsuit.
- Confession of judgment. In New York, CPLR 3218 allows a funder to confess judgment against you without filing a lawsuit. However, as of August 30, 2019, a confessed judgment in New York can only be filed in the county where you resided. If your business doesn’t have a location in New York, the funder can’t confess judgment there. Pennsylvania still allows commercial confessed judgments. As of September 1, 2025, Texas prohibits a confessed judgment in a sales-based financing contract, and as of July 1, 2022, Virginia does too.
- Arbitration. Some cash advance agreements have a clause that allows the funder to send the case to arbitration. If the arbitrator rules for the funder, a court can turn the award into a judgment. In June of 2026, the Attorney General sued Rapid Ruling, an arbitration service which heard approximately 3,000 arbitrations in its first three years, and in 97% of those arbitrations, the small business didn’t even appear.
Can a cash advance company sue me if my business isn’t located in New York?
Yes. Most cash advance contracts are governed by New York law and let the funder sue you in a New York court. Even if neither you nor the funder reside in New York, a lawsuit can be brought in any New York county the plaintiff chooses in accordance with New York’s venue statute, CPLR 503(a).
New York’s statutory safe harbor for New York choice of law clauses covers transactions of at least $250,000 under General Obligations Law 5-1401, and New York lets a non-resident plaintiff sue a non-resident defendant there on contracts of at least $1,000,000 under General Obligations Law 5-1402. For smaller transactions, New York courts will likely still enforce the choice of law and forum clauses, but may be open to your motion for dismissal for inconvenient forum, because CPLR 327(b) only bars that dismissal if the contract is for at least $1,000,000.
Once the funder gets a judgment from a New York court, it can enforce it anywhere in the United States in accordance with 28 U.S.C. 1738. If the funder sues a Pennsylvania business in Pennsylvania, the lawsuit can be brought in the county where your registered office or principal place of business is located, where you regularly conduct business, or where the transaction took place in accordance with Pa.R.C.P. 2179(a).
What can a funder do before it has a judgment?
Not as much as a demand letter would have you believe. They can’t, for example, issue a restraining notice to freeze your bank account without a judgment (see CPLR 5222). They can’t attach your assets without a court order and a showing such as hiding assets. However, they can put pressure on your customers by notifying them that, since you defaulted, as your secured party they can now collect from them directly under UCC 9-607. If you think a lawsuit is coming, see the 7 signs that your MCA funder is about to file suit and the window you may have to settle.
Why do so many MCA funder lawsuits result in settlements?
Both sides have risk, and the funder’s has increased dramatically in recent years. Under the three part test of LG Funding v. United Senior Properties of Olathe, if 1) there is no real reconciliation, 2) the “advance” has a finite term, and 3) the funder has recourse if you file for bankruptcy, the courts can consider it a loan. And, if it’s a loan, under the New York Court of Appeals’ 2021 decision in Adar Bays v. GeneSYS ID, if the loan is criminally usurious, over 25%, the loan is void ab initio. And, under GOL 5-521, the only usury defense a corporation can raise is criminal usury. In 2023, the 2nd Circuit Court of Appeals found that an MCA was a usurious loan in Fleetwood Services v. Richmond Capital Group. Finally, in January of 2025, the NY Attorney General announced the $1.065 billion judgment settlement with Yellowstone Capital that cancelled $534.5 million in debt.
Of course, you also have risk if a lawsuit is filed, especially if your contract provides for attorney’s fees. Also, if you put up a guaranty, your personal assets may be at risk if the funder obtains a judgment. Finally, under CPLR 321(a), a corporation cannot appear in court without a lawyer. Settlements after suit often have the funder hold a stipulated judgment in escrow, file it only if you miss payments, and file UCC-3’s to terminate its UCC-1’s once you’ve paid in full. If your funder is already suing you, see what you need to do when your MCA funder sues you.
Frequently Asked Questions
How long does the cash advance company have to sue me?
Under New York law, which most MCA contracts are governed by, the funder has 6 years to file suit under CPLR 213(2).
Can I go to jail if I don’t pay my MCA?
No, defaulting on an MCA is a civil matter, and contract debt cannot result in jail time.
Does the FDCPA apply to my business?
Generally, no. The FDCPA only applies to consumer debts, meaning debts from transactions “primarily for personal, family, or household purposes.” However, California passed SB 1286, which extends the protections of the Rosenthal Act to covered commercial credit of $500,000 or less, and it went into effect on July 1, 2025.
Didn’t New York ban confessions of judgment?
Sort of. Since 2019, a confession of judgment can only be filed in a New York county where the defendant resided. So, while your business may be protected if it’s not located in New York, if you’re in New York, you’re not. However, on May 13, 2026 the New York State Senate passed a bill to prohibit confessions of judgment on debts of less than $5,000,000, but it is not yet law.