Is there interest on Merchant Cash Advances (“MCA”) in default? MCA contracts usually have a judgment interest clause providing for 24% per annum (or 16% if a sole proprietorship), plus a flat default fee, a 25% liquidated damages charge and attorney fees. New York courts may refuse to enforce any that work as a penalty.
Why does an MCA charge interest if it says it isn't a loan?
Interest on an MCA is only assessed in default. Cedar Advance’s 2023 purchase agreement, filed with the SEC, states that the purchase price “is not intended to be, nor shall it be construed as a loan,” so the payment terms have no interest rate. The interest is in Section 40 of the Cedar Advance Purchase Agreement, which provides for “prejudgment interest at a rate of 24% per annum (or 16% per annum if sole proprietorship)” and 24% per annum from the entry of judgment. A 2025 ARIN Funding MCA Purchase Agreement adds to the same clause “or the maximum rate permitted by applicable law if less.”
What rate does MCA default interest usually run at?
The MCA contracts we’ve seen provide for 24% per annum or 16% if a sole proprietorship. Without a contract rate, the statute allows 9% per annum, see CPLR 5004, accruing from “the earliest ascertainable date the cause of action existed,” CPLR 5001. Courts have awarded higher contract rates on MCAs, e.g., AL Infinity v Innovative Concepts & Design (1 Dept 2024), which awarded “contractual interest of 18%.”
The contracts do not state why they use 24% and 16%, but we believe the 24% is one percent less than the criminal usury rate of 25% in Penal Law 190.40 and 16% is the civil maximum under Banking Law 14-a, which may not be raised as a defense by a corporation under GOL 5-521.
What else do you have to pay if you default on an MCA?
The interest would usually be the smallest amount due to the funder when you default. The other fees and charges in the Cedar and ARIN MCA contracts are:
| Type of Charge | Amount |
|---|
| Blocked Account/Default Fee | $2,500 “If an Event of Default has taken place” |
| Returned or Rejected ACH | $50 each |
| Liquidated Damages | 25% of unpaid amount “purchased” |
| Attorney Fees | May be a contingency fee of up to 40% of amount claimed |
| Collection Costs | Court, arbitration, agency, attorney and expert fees |
| Judgment Interest | 24% per year (16% if sole proprietor) |
Other contracts use the greater of $5,000 or 18% of the outstanding balance, and 25% or $5,000 plus 9% interest from default.
How much can a $200,000 balance grow after default?
Under the Cedar and ARIN forms, if you did not pay a balance of $200,000, they could sue you for over $350,000 before a year of interest accrued. The liquidated damages of 25% would be $50,000 and the flat fee of $2,500 would bring the balance to $252,500. The interest at 24% on $252,500 is $60,600 per year, $5,050 per month or $166 per day, compared with $1,894 per month at the statutory 9%. The 40% contingency fee on $252,500 would be $101,000. On acceleration, see our post on Notice of Default and Acceleration and what it costs.
Isn't 24% on top of all those fees usury?
Probably not. Federal courts applying New York law have stated that usury “does not apply to defaulted obligations” and that “penalty interest rates or late fees” do not constitute usury, Bristol Investment Fund v Carnegie International (SDNY 2003). Usury looks at the original obligation, and if the MCA were really a criminally usurious loan, the whole contract would be void, Adar Bays v GeneSYS ID (2021), and so would the default charges. Over 3000 MCAs were found to be loans in People v Richmond Capital Group (1 Dept 2026), whose interest rates “can readily be calculated based on the information provided on the face of the MCAs.” Civil usury does not apply to loans of $250,000 or more and criminal usury does not apply to loans of $2,500,000 or more, GOL 5-501(6).
When is an MCA default charge an unenforceable penalty?
To be an unenforceable penalty under New York law, the amount fixed must be “plainly or grossly disproportionate to the probable loss,” Truck Rent-A-Center v Puritan Farms 2nd (1977), as quoted in JMD Holding Corp. v Congress Financial Corp. (2005). The defendant bears the burden, and the clause is judged as of signing. Bristol also states that “any doubt ... should be resolved in favor of a construction which holds that the provision is a penalty.”
The best argument is that MCA default charges recover for the same loss more than once. The funder’s loss is the unpaid purchased amount plus collection costs, knowable at signing, so a 25% charge, plus 24% interest, plus a 40% fee on that amount should be a multiple recovery. This argument requires proof. JMD failed because its President’s affidavit was “conclusory” and “relied entirely on the memorandum of law.” Fora Financial Advance v 4 Pillar Consulting (1st Dept. 2025) states that such provisions “have routinely been held to be enforceable against sophisticated parties,” though Richmond Capital states that the merchant’s sophistication is not dispositive. My research found no New York appellate case striking an MCA 25% default clause as a penalty.
A default charge can also be found in a Settlement Agreement. In Diesel Funding v Build Retail (2nd Dept. 2026), the MCA funder sued the merchant and the case settled for $1,150,740.12. The merchant made no payments, and the clerk entered a judgment for $1,476,330.68 without notice, as the Settlement Agreement allowed, adding “fees equating to twenty percent of the then remaining settlement balance” plus costs and interest. The appellate court refused to vacate it. It is one of the five mistakes that double your MCA debt.
Frequently Asked Questions
Why do they charge 16% for sole proprietorships and 24% for others?
The MCA contracts do not say. The 16% matches New York’s civil usury rate, which individuals can assert; corporations and LLCs can assert only criminal usury, which is over 25%.
Does the MCA default fee kick in if one debit fails?
The $2,500.00 default fee in the Cedar and ARIN forms only kicks in if there is an “Event of Default,” as listed in the Events of Default section.
Can the court rule on the penalty issue early in the case?
In Fora Financial Advance v. 4 Pillar Consulting, the First Department refused to rule on whether an MCA industry fee was an unenforceable penalty at the motion to dismiss stage. It is a fact-specific issue.
Has New York passed a law limiting MCA default fees?
I have not found one. New York’s FAIR Business Practices Act, effective February 17, 2026, allows the Attorney General to pursue unfair and abusive business practices, and S10127, a bill to cap MCA interest rates, was introduced on April 30, 2026 but has not been enacted.