A court may find that your merchant cash advance (MCA) is actually an illegal loan. The MCA usury defense argues that the effective interest rate of the MCA exceeds the usury cap in New York of 25% (which is “criminal usury”), so the deal is void. It’s a defense when a funder sues you to collect. Courts have ruled both ways on it.
When does a court find that an MCA is actually a loan?
New York courts treat an MCA as a loan if the funder is “absolutely entitled to repayment under all circumstances.” They weigh three factors: whether there’s a real reconciliation provision, whether there’s a finite term, and whether the funder has recourse if you file bankruptcy. As the Second Department explained in LG Funding v United Senior Properties of Olathe (2020), “where there is no loan, there can be no usury, however unconscionable the contract may be.” We explain each factor here: Is it a loan or purchase of receivables?
Can an LLC or corporation raise the MCA usury defense?
Yes, but only criminal usury. General Obligations Law § 5-521 says “No corporation shall hereafter interpose the defense of usury in any action,” then carves out “a defense of criminal usury as described in section 190.40 of the penal law.” LLC Law § 1104(c) says the same for LLCs. So ignore websites citing a 16% cap for businesses, and look at 25% per year under Penal Law § 190.40. Deals of $2.5 million or more aren’t subject to the criminal usury cap under GOL § 5-501(6)(b). Run the APR math with our usury and disguised loan self check.
How can you raise the MCA usury defense?
You can raise it as an affirmative defense in your answer to the lawsuit. In LG Funding, the court kept the usury defenses alive and denied the funder summary judgment because it was a triable issue.
You can also move to dismiss the complaint on the face of the contract documents. In Crystal Springs Capital v Big Thicket Coin (2023), the funder paid $90,000 for $140,000 in future receipts, with a holdback of $4,000 per business day. The funder was “under no obligation” to do one, and if the merchant switched processors or went bankrupt, the funder could demand the whole balance. The court held that the documents “conclusively established” a criminally usurious loan and dismissed the complaint.
You can file your own lawsuit to challenge a confession of judgment. In Oakshire Properties v Argus Capital Funding (2024), the Appellate Division held that a plenary action was the proper way to challenge it. Two days after the merchant asked for a payment reduction, the funder filed a confession of judgment for $319,993.20, plus $105,822.75 in fees and costs.
Can you sue the funder for usury?
Not very often. For a business, criminal usury is only a defense, not a claim. In LG Funding, the court dismissed the usury counterclaim for that reason. Crystal Springs likewise refused to declare that the funder couldn’t collect principal or interest, because the merchants hadn’t pleaded a counterclaim. In Oakshire Properties, the separate lawsuit’s usury claims were dismissed as untimely under the one-year statute of limitations in CPLR 215(6), and the Appellate Division didn’t disturb that ruling on appeal.
Which MCA cases have merchants won and lost?
Merchants have won cases where the reconciliation was optional for the funder, and lost where the contract gave them real payment flexibility:
| Case | Key terms | Outcome |
|---|
| Crystal Springs (2d Dept 2023) | Daily debit of $4,000 and no obligation to reconcile; bankruptcy triggers entire balance due | Merchant won; complaint dismissed |
| Oakshire (4th Dept 2024) | Failure to reconcile “would not constitute a breach”; changes in funder’s “sole discretion” | Merchant’s case to vacate survived |
| Principis (2d Dept 2022) | Payments adjusted based on monthly sales; bankruptcy not a default | Funder won |
| Spin Capital (2d Dept 2026) | $5 million in exchange for $7.5 million; adjustment clause; bankruptcy not an event of default | Funder won; judgment for $8,234,160.50 affirmed |
| NewCo (4th Dept 2026) | Mandatory reconciliation; bankruptcy not a breach | Funder won summary judgment |
Two recent Second Department decisions, Apollo Funding (2025) and Diesel Funding (2026), refused to consider whether the reconciliation clause was illusory because the merchant never requested reconciliation.
What happens if a court agrees that an MCA transaction is a usurious loan?
In Crystal Springs, the court stated that “a loan that is criminally usurious is void.” Nonetheless, in People v Richmond Capital (February 2026), the First Department affirmed Richmond Capital’s liability for more than 3,000 MCAs, but vacated the $77,289,631 award and remanded to exclude principal and account for offsets.
What changes if my company files bankruptcy?
The same test applies to a company in bankruptcy. The debtor may recharacterize an MCA transaction by bringing an adversary proceeding against the funder. In In re Crosby Marine Transportation (Bankr. E.D. La. June 2026), Crosby Tugs sought to unwind two MCA agreements in which Crosby sold $525,000 in future receipts to Freedom Funding in exchange for $350,000. The court granted summary judgment on the contract terms alone, finding both agreements were, in substance, loans, so the receivables belonged to the bankruptcy estate.
My company is in Pennsylvania. Does New York law apply?
Most MCA contracts provide that New York law governs and that the parties consent to New York courts. If the funder has a confessed judgment, Pa.R.C.P. 2959 gives you 30 days after notice of the judgment to petition to strike or open it. You must raise all grounds in that one petition. It will be opened if your evidence would require the issues to go to a jury.
Frequently Asked Questions
My contract says that it is not a loan. Can I still raise a usury defense?
Courts look past the contract’s labels to the substance of the transaction, and New York General Obligations Law Section 5-521 provides that a waiver of usury laws, signed either before the funding or within 60 days of the funding, is “absolutely void.” The critical inquiry is whether the contract actually provides for reconciliation, a set term and recourse in bankruptcy.
The funder got a default judgment against me. Is it too late to raise a usury defense?
Not necessarily. In Crystal Springs Capital v Big Thicket Coin, the Second Department vacated a default judgment in the interest of justice without requiring a reasonable excuse. It also vacated the restraining notice on the merchants’ bank account, because the contract evidenced a criminally usurious loan.
I signed a settlement stipulation. Can I still raise a usury defense?
Probably not. In Diesel Funding v Build Retail, the merchant settled, defaulted on the stipulation, then moved to vacate the $1,476,330.68 judgment on usury grounds. The court denied the motion.