An MCA may be considered a loan or a purchase of receivables depending on the contract terms and the way the funder ran it, regardless of the labels in the agreement. New York courts examine whether the funder was absolutely entitled to repayment under all circumstances, and they look at:
- whether the contract was reconciled;
- whether the MCA had a term; and
- whether there was recourse in the event of the merchant's bankruptcy.
If you're asking "is my MCA a loan?" because it feels like you're making loan payments, you're in good company. New York courts have struggled with this issue for six years and have come out on either side depending on the facts.
Why does it matter whether an MCA is a loan or a sale?
It matters because usury only applies to loans. As the Appellate Division stated in LG Funding v. United Senior Properties (2d Dept 2020): "Where there is no loan, there can be no usury, however unconscionable the contract may be."
The sale argument also relies on the Uniform Commercial Code, which applies to a security interest "regardless of its form" as well as a sale of an account or payment intangible. UCC § 9-109. When a business sells an account, it "does not retain a legal or equitable interest" in the account sold. UCC § 9-318(a). This matters in bankruptcy, because sold receivables are not part of the bankruptcy estate, whereas loan collateral is.
What factors do courts consider when determining if an MCA is a loan?
Courts consider whether the agreement includes a reconciliation provision, whether the MCA has a finite term, and whether there is recourse in the event of the merchant's bankruptcy. All three relate to whether the agreement put some risk on the funder if the receivables never came in.
| Factor | Points toward a sale | Points toward a loan |
|---|
| Reconciliation | Mandatory adjustment that tracks your actual sales | Adjustment at the funder's "sole discretion," or never performed |
| Term | No term, because payments rise and fall with receipts | Fixed payments that imply an end date |
| Recourse | Closing or going bankrupt isn't a breach | Bankruptcy or closure triggers full repayment and guaranties |
This test is now followed by the Second, First, and Fourth Departments of New York's Appellate Division, and by the Second Circuit in Fleetwood Services v. Richmond Capital Group (2023). If you're wondering about your own contract, read our article on the 5 signs your MCA is a disguised loan.
How do courts analyze the reconciliation factor?
The contract should let payments be lowered when the business's sales decrease. If the funder merely "may" reconcile the agreement in its "sole discretion," the right to reconcile is illusory, as the court held in LG Funding.
Even if the contract makes reconciliation mandatory, if none was performed in practice and requests were denied, the MCA will be considered a loan. See People v. Richmond Capital (1st Dept Feb. 2026) (affirming that over 3,000 MCAs were loans). On the other hand, where payments were adjusted to the business's monthly sales, the MCA was not a loan. See Principis Capital v. I Do (2d Dept 2022).
Note that if you never asked for reconciliation, this factor may be used against you. See Apollo (2d Dept 2025) (refusing to consider whether the process was illusory because the merchant never asked; the funder won).
How do courts decide whether an MCA has a finite term?
In Oakshire (4th Dept 2024), the court found a finite term by dividing the purchased amount by the fixed payment. The funder bought $554,850 of receivables for $411,000 and would collect $2,935.71 per day, a term of 189 business days. A federal court noted that "a fixed term is typical of a loan."
Why does recourse on bankruptcy point toward a loan?
Recourse in the event the merchant goes bankrupt suggests a loan. A true purchaser of receivables would have no recourse and would suffer the loss. In LG Funding, bankruptcy was an event of default requiring "immediate full repayment" and allowing enforcement of the guaranty. That showed the funder did not take the risk of receivables being low or non-existent if revenue ceased. In Richmond Capital, the agreement did not mention bankruptcy but made it a breach for the business to "interrupt, suspend, dissolve or terminate its business." In contrast, in NewCo (4th Dept 2026), the funder won in part because going bankrupt or out of business was not a breach.
What happens if a court decides your MCA is a loan?
You gain the ability to raise usury. In New York that is limited, as corporations and LLCs cannot raise civil usury pursuant to General Obligations Law 5-521. They can, however, raise criminal usury, meaning interest greater than 25% per annum under Penal Law 190.40. A criminally usurious loan is void ab initio. However, in Richmond Capital, the court remitted the case for a recalculation of the $77,289,631 award to exclude the principal amount. Deals of $2.5 million or more fall outside New York's usury caps. The rate math is explained in Can a Merchant Cash Advance Be Usurious? and the defense in Is My MCA an Illegal Loan? The Usury/Disguised Loan Defense.
Frequently Asked Questions
Does the filing of a UCC-1 mean that my merchant cash advance is a loan?
No. The sale of accounts and payment intangibles is covered by Article 9 of the UCC, as are security interests, and either one calls for the filing of a UCC-1. However, courts have held that the existence of a broad security package, encompassing all of the merchant's assets, is indicative of a loan.
Does the existence of an APR on my disclosure forms indicate a loan?
No. States such as New York, California and Texas have laws that require certain disclosures for sales-based financing transactions. In fact, the New York disclosure form specifically states that the estimated APR is not an interest rate.
Does the court need to find all 3 factors to determine that my merchant cash advance is a loan?
No. Federal courts in New York have stated that the 3 factors are simply a guide and that the court need not find all 3 factors. Courts have considered other factors, including whether the funder underwrote the merchant's credit as opposed to the credit of its customers.
Did Texas HB 700 determine that merchant cash advances are loans?
No. Texas passed a law regulating merchant cash advances as sales-based financing. The law, which took effect on September 1, 2025, voids MCA contracts with confessions of judgment and limits the funder's ability to obtain automatic debits, but it does not impose a rate cap or provide merchants with a private right of action.