When Does a California Business Need an MCA Defense Lawyer in 2026?

You’re thinking, “When do I need a lawyer?” and the response is often “Yesterday.” If the majority of your income is being withdrawn as part of daily ACH payments and you signed a personal guarantee, it may be time to get a lawyer. If you can negotiate a reasonable agreement on your own and pay what you owe, that’s fantastic. All I’m saying is, make sure you can handle it on your own first.

Those are not the only signs. The red flags are these: Is there a confession of judgment (“agreed judgment”?) signed? Maybe you need a lawyer. Is there a UCC on file? Are you still making fixed payments even if your cash flow has changed? Did you get an onslaught of calls and texts from the funder all day? From the lawyer? From the Collection Rep? Did they put a lockbox on your swiper? Do you need monthly payments, not daily? Are your bank accounts frozen? Did they call your clients or vendors? Did you call the funder and ask for a different payment schedule after sales declined, only to be turned down? Did the funder ask you to put your house up as collateral? If that sounds like you this week, you’ve got red flags. They’re not red flags flipping you the bird and wiping their noses on $100 bills red flags, but they’re red flags nonetheless. In any case, get help where you can.

Confession of Judgment Loophole

Let’s hypothesize that you live in California, and your funder lives in New York. They had you sign a confession of judgment. But in September 2019, New York closed its confession of judgment loophole. The new law prohibits funders from using a confession of judgment against an out-of-state borrower. So if you’re a business in California and you receive funding from a New York funder, that NY funder cannot COJ you. “But wait,” you say. “What about if I’m in California and I get funded by a Nevada funder? Or a Delaware funder? Or a funder in any other state?” Good question! The answer is that the New York law applies only to New York funders.

The California Financing Law

California has its own law on this. On August 31, 2018, the state Senate and Assembly passed SB 1235, and Governor Brown signed it on September 30, 2018. SB 1235 amends the California Financing Law. It doesn’t require MCA funders to obtain a license, but it does bring non-loan commercial financing like merchant cash advances under the CFL. If a funder is offering you $500,000 or less in commercial financing, it is required to provide you with a cost disclosure statement prior to funding and you need to sign it. The disclosure must include the amount financed, the total cost, the term, the frequency of payment and the amount, the method of payment, an explanation of what happens if you pay early, and the total cost as an annual percentage rate.

In SB 1235, there’s no requirement that funder ensures funds are used for a business purpose, even though it is written around “commercial financing.” It also leaves the details open. It does not define the terms or explain how to calculate them, and it does not say how, when or in what format to disclose it. All of that is left to the DBO to figure out in regulations.

Then there is licensing. In California, there’s nothing to stop you from calling yourself an MCA lender and opening for business tomorrow. No background checks. No licenses. No bonding. Some states are beginning to consider it. At some point people think that with the implementation of the CFL rules, funders will be forced to obtain licenses.

Where This Product Came From

It helps to know where this product came from. Barbara S. Johnson is listed as the inventor of split funding. That is the system that lets a funder get repaid automatically from a credit card processor it shares with the merchant, and she got a patent for it in 1997. At the time she had 4 Gymboree Playgroup & Music franchises and needed to market the hell out of those franchises for the summer and couldn’t get working capital to do so. “What if I could borrow money against future credit card sales,” is what she asked. She was thinking of the parents who would bring their kids back for fall classes. It was a year after that she and her husband started a company named AdvanceMe which became CAN Capital.

The stakes are real, too, because the effective interest rates on these things was so astronomical and (so incredibly lucrative for the funders) that even the big public corporations got in the MCA biz (Shopify, Square, Paypal, American Express, etc.). Morgan Stanley backed some. And other investment banks back some. Hedge funds fund MCAs too. One law firm claimed to have seen MCAs with an effective APR of greater than 1,200%.

So, back to the question in the title. When does a California business need an MCA defense lawyer? “Yesterday,” is probably the answer. Yesterday, when you signed a personal guarantee. Or yesterday, when the funder asked you to sign a confession of judgment. Or yesterday, when you agreed to pay a fixed daily payment that is eating up too much of your cash flow. Or yesterday when the lawyer called you. Or yesterday when the Collection Rep texted you again. Or yesterday when the funder lockboxed your credit card swiper. Or yesterday when the funder froze your bank account. Or yesterday when the funder called your clients or vendors. Or yesterday when the funder asked you to put up your house as collateral. Or yesterday, when you called the funder and asked to restructure the payment schedule because your sales dropped, and they didn’t do it. Or, you know, yesterday.