A reconciliation clause in a merchant cash advance is a contract term that allows the fixed daily or weekly debit to be adjusted, so that the funder receives the percentage of the business’ sales set forth in the contract. Courts have held that a real (as opposed to illusory) reconciliation clause shows that the funder actually purchased the business’ receivables, while the absence of a valid one may lead a court to find that the transaction is a loan, and therefore subject to the usury laws.
What does an MCA reconciliation clause actually do?
It ties the fixed payment to the business’ real revenue. In a typical MCA, the funder does not take the agreed percentage of each day’s revenue. Instead, it takes a fixed debit based on what it estimated the business’ average daily receipts to be before funding, and the reconciliation clause is the only link back to actual receipts. In an MCA Agreement Cedar Advance filed with the SEC, the daily ACH debit is an “approximation of no more than the Specified Percentage, subject to reconciliation,” and a reconciliation is completed within 2 business days, with ACH debits paused in the meantime. We also explain how to calculate the Specified Percentage in an MCA.
Why does a reconciliation clause determine whether or not an MCA is a loan?
Usury only applies to loans, and New York courts treat money as a loan only if it is “repayable absolutely.” As the Second Department held 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.”
Where payments track receipts, the funder runs the risk of waiting longer if receipts fall, and of never being repaid if the business goes under. If there is no reconciliation clause and the funder is due a fixed payment regardless of receipts, all of the risk lies with the business, and the transaction resembles a loan much more closely. That is why reconciliation is one of the three factors courts weigh (with a finite term and recourse in bankruptcy). It also feeds the second factor, since a fixed payment lets a court calculate a finite term by dividing the amount purchased by the debit. The First, Second, and Fourth Departments have all adopted this test, most recently in Kapitus v Suburban Waste (1st Dept, February 26, 2026). See our analysis of whether an MCA is a loan or a purchase of receivables.
How do courts view different types of reconciliation clauses?
Courts look at the wording and at what the funder actually did.
| Type of reconciliation clause | Example case | Result |
|---|
| None; funder “under no obligation” to reconcile | Crystal Springs v Big Thicket Coin (2d Dept 2023) | Criminally usurious and void ($4,000 per business day) |
| Funder “may” adjust payment “in its sole discretion” | LG Funding (2d Dept 2020) | Triable issue on loan status; criminal usury defense survived |
| Sole discretion, and refusal “would not constitute a breach” | Oakshire v Argus (4th Dept 2024) | Clause “appears illusory”; funder’s motion to dismiss denied in part |
| Required by agreement, but never performed | People v Richmond Capital (1st Dept 2026) | Over 3,000 MCAs held to be loans; funders’ usury liability affirmed |
| Unclear whether mandatory or discretionary | Kapitus v Suburban Waste (1st Dept 2026) | Funder not entitled to summary judgment |
| Required by agreement and performed | Principis (2d Dept 2022) and NewCo (4th Dept 2026) | MCAs held to be sales; funders prevailed |
Even a well-drafted clause isn’t guaranteed any weight. In In re Crosby Marine (Bankr. E.D. La. June 2026), the contract allowed unlimited reconciliations, yet the court determined that any adjustments went only to the timing of the payments, not the total amount owed.
Does it hurt you if you didn’t engage in the reconciliation process?
If you’re in the Second Department, the answer is yes. In Apollo Funding v Dave Reilly Construction (2025), DRC took $25,000 for $37,750 of receivables, paid $14,240, and argued the reconciliation process was illusory. The court refused to consider it “because DRC did not engage in the agreement’s reconciliation procedure,” and awarded summary judgment to Apollo. Diesel Funding v Build Retail (April 2026) applied the same rule. A documented request that was refused may have helped, as it did in Richmond and Oakshire. To learn how to initiate one, see What is a Reconciliation Clause, and How Do I Use It to Reduce Payments?
If the reconciliation clause is illusory or missing, can you raise usury as a defense?
You can raise it, but you have a few more hoops to jump through. A New York corporation or LLC cannot raise civil usury under General Obligations Law Section 5-521. The only usury defense left is criminal usury under Penal Law Section 190.40, which applies only if the annual interest rate exceeds twenty-five percent. Most MCAs are priced above that level (a 6-month MCA at a 1.35 factor annualizes to roughly 126%). The First Department in Richmond noted that without a reconciliation process, the annual interest rate “can readily be calculated” from the face of the contract.
If you prove a criminally usurious loan, the Court of Appeals held in Adar Bays v GeneSYS ID (2021) that it is void ab initio. But in Richmond, the First Department sent the $77,289,631 award back to exclude principal and consider offsets, and in LG Funding the usury defense survived while the merchant’s counterclaim did not. Finally, no New York law regulates interest rates on loans of $2,500,000 or more, under General Obligations Law Section 5-501.
Frequently Asked Questions
Can a reconciliation clause increase the amount I pay?
Yes, if it’s a two-way street. Under the contract Cedar Advance filed with the SEC, either party can initiate a reconciliation, and if Cedar collected less than the specified percentage entitled it to, it will debit the additional amounts.
Will a reconciliation reduce the total amount I pay?
No, because a reconciliation only adjusts the timing of your payments. If the daily debits are reduced, it simply takes longer to deliver the purchased amount.
If the reconciliation clause is illusory, is the MCA usurious?
Not necessarily. The reconciliation clause is only one of three factors, alongside the finite term and recourse in bankruptcy. Even a loan must bear more than 25% a year to be usurious as to a corporation or LLC. And New York doesn’t have any rate laws applicable to MCA transactions of $2.5 million or more.
Won’t New York change the law to regulate MCAs?
Maybe, but it hasn’t yet. In January 2026, the Senate re-referred bill S1726, which would subject MCAs to the usury law, to the Senate Judiciary Committee. It has not been enacted, so the courts’ analyses remain good law.