Merchant Cash Advance in California
Can I pay off my Merchant Cash Advance in California? A Merchant Cash Advance is basically a “sale” of your business’ future sales to a company. Your funders withdraw fixed daily or weekly payments from your business bank accounts. Once they stop being paid, the funder will file a lawsuit against you. Almost all of the Merchant Cash Advance contracts include a forum selection clause to New York. The only honest answer to the title is ‘It depends’. If you are being sued in New York, you need a New York attorney.
If you have a New York judgment that needs “enforced” in California, if you have an account in California that has been levied, if you are bankrupt, then you need a California attorney. If you are a merchant and have not been sued yet, but you can’t make payments anymore, you need to hire a settlement negotiator or a bankruptcy lawyer. SB 1235. 2018. Department of Financial Protection and Innovation regulations effective December 9, 2022. The state regulator’s rules for sales based financing for a business which is primarily managed or operated in California. Financing over $500,000 is excluded. The funder must provide the merchant with a standardized summary of the offer, including cost, term, payment schedule and estimated annual percentage rate before signing the contract. If the funder failed to make this disclosure it is a major problem with the state regulator. It is a great leverage point for the merchant to use in any negotiation.
Disclosure law passed in 2025 (strengthened by ). Governor signed bill on October 6, 2025, . S.B. 362, Signing and processing, October 6, 2025. It adds that funders can no longer use the words “interest” or “rate” in a misleading manner. Funders are required to disclose the charges or quote they will charge and the APR after an offer has been made. This bill was intended to address the problem that funders use factor rate and fee rate pricing which might result in a customer not being provided with the correct annualized price. An offending licensed lender will be found in violation of the California Financing Law. An offending unlicensed funder will be found in violation of the California Consumer Financial Protection Law for engaging in unfair, deceptive or abusive practices.
Usury Cap
The state’s usury cap, specified in Article XV, Section 1 of the California Constitution, is set at 10% per year or 5% above the rate at which the San Francisco Federal Reserve Board advances funds, whichever is greater, for business loans. The cap does not apply to banks, credit unions or lenders regulated by the California Financing Law. Repayment of an advance in a matter of months at a fixed markup is equivalent to an annual interest rate far exceeding 10%. That fact is not relevant unless a court characterizes the advance as a loan. If the advance is a purchase of receivables, it is not a loan, and therefore is not subject to the usury cap.
A Los Angeles federal court has determined that a merchant cash advance is a loan. In the case of “Essex Partners v. Merchant Cash Capital, 2011 (2011)” the United States District Court for the Central District of California found that the transactions at issue were made “with the ‘sole purpose’ of making loans at usurious rates of interest.” In the case of Essex Partners v. Merchant Cash Capital, 2011 (2011), the funder bought a percentage of the daily credit card sales of a merchant. However, the funder obtained so many protections within the contract that it was determined to be a loan. This finding was consistent with the California Supreme Court case of Milana v. Credit Discount Co. (1945) where it was determined to not be a sale of accounts even though the contract was labeled as a sale of accounts. Essex Partners was only a trial court decision, and is not binding on any court.
Debt Collection Act
The Rosenthal Act is a debt collection act in the United States state of California. SB 1286 is applicable to commercial debt entered into, renewed, sold, or assigned on or after July 1, 2025. It is applicable to individuals. Individuals includes a business owner who has personally guaranteed a business debt. It is applicable to a debt owed to one creditor that is $500,000 or less. It is currently unclear whether the act is applicable to a merchant cash advance. One national law firm is of the opinion that the act only applies to credit transactions and is not applicable to sales of receivables. Another national law firm is of the opinion that the act does apply to qualifying advances.
Confession of Judgment
Before 2019, the primary vehicle used by funders in obtaining access to out of state merchants was the confession of judgment. A confession of judgment is a legal device a creditor can use to obtain a judgment against the debtor without having to file a lawsuit. Your creditor can get a judgment against you without even suing you. All they have to do is file an affidavit in court that you signed. New York’s ‘confession of judgment’ statute (CPLR 3218) was amended on August 30th, 2019. A confession of judgment in New York must be filed in a county where the defendant resides at the time of signing the confession of judgment, or in a county where the defendant resides at the time of the filing of the confession of judgment.
A business resides in a county where it has a place of business. If you are a company located in California with no place of business in New York, you will not be able to have a confessed judgment filed against you in New York after August 30th, 2019. Confessions of judgment filed before that date are still valid.
In addition, a confession of judgment is also not enforceable in California. [Confession of judgment] California Code of Civil Procedure Section 1132 as of January 1, 2023 in California reads “A confession of judgment is unenforceable and no judgment shall be entered on the confession in any superior court in this state. For any period prior to January 1, 2023, a confession of judgment is enforceable in California if the debtor has been advised by a non-confessing attorney that he or she has received a certificate signed by the attorney who has advised the debtor. Any confession entered prior to January 1, 2023 is enforceable under the previous law. As of today under California law a funder cannot bring a confession signed by a merchant in California to a California court house.
Forum selection clauses are the new confessions. Under California law, in Smith, Valentino Smith v Superior Court (1976), the California courts found that it is assumed that forum selection clauses are valid. In EpicentRx v Superior Court (2025), the California Supreme Court upheld a forum selection clause requiring the parties to litigate in the State of Delaware (despite there being no jury trial in Delaware) and stated that the policy of the California courts for juries “does not apply beyond California’s borders.” This means that if you are a California merchant suing a funder in California they’ll be motioning for a transfer to New York. Statutes declaring forum selection clauses unenforceable for certain types of contracts remain valid.
Cap Call, LLC v. Superior Court (2020) – A freight forwarder in the Bay Area did 5 advances with a funder. They got a judgment by confession in New York and domesticated in Contra Costa County for $436,343.67. Merchant filed in Sacramento to set aside advances as usurious loans. Third District Court of Appeal held that the forum selection clause was mandatory and that suit must be brought in New York, at the election of the funder. The opinion is not binding, it was unpublished. Merchant also didn’t petition to set aside domesticated judgment so that was ok too.
Court of general jurisdiction the New York Supreme Court for the funders. California superior court, if the merchant (plaintiff, you, suitor in the first instance), or for the funder to enforcement of the judgement. Northern District of California, Eastern District of California, Central District of California, Southern District of California. Appeals for all four districts in the Court of Appeals of the Ninth Circuit. If you were served by a Summons in New York, go to Court. Otherwise the default judgment home.
A judgement obtained in a New York state court is not entitled to recognition by the courts of California unless it is domesticated pursuant to motion brought pursuant to the California Sister State Money Judgments Act, CCP Sections 1710.10 to 1710.65. A motion to set aside judgement may be made by a merchant within 30 days from the date of service of the notice of entry of judgement and any defense available under the laws of California. Writ of execution shall not issue for 30 days. If a motion to set aside judgement is timely made, it will stay the judgement from being enforced while the motion is pending. The jurisdiction of a court may be challenged at any time.
Some debtors lose 30 day stay of execution . The California Code of Civil Procedure Section 1710.45 exempts all corporations formed outside of California and which have not qualified to do business in California. A creditor is permitted to circumvent the 30-day waiting period by motioning the judge for “great or irreparable injury.” A federal judgment is also different than a state court judgment. 28 U.S.C. 1963 , a creditor can “register” a final judgment of a federal court in any district court in the state of California. The judgment will then be enforced as if it were a California judgment.
New York bank restraining notices are not as effective as creditors believe In Motorola Credit Corp. v. Standard Chartered Bank (2014) New York’s highest court held that a restraining notice served at a bank’s New York branch did not “freeze” accounts of the bank’s customer at the bank’s branches overseas. New York courts have not decided whether the “separate entity rule” applies to accounts maintained at a bank’s branches in other states. A frozen bank account in California should be addressed by an attorney familiar with California and New York enforcement procedures.
If you have an open lawsuit in New York, you have to call somebody. You are going to need a New York licensed attorney to appear in New York to answer, to file a motion to dismiss, to get a default vacated in New York. If you have a domesticated judgment, you are going to need a California licensed attorney to file a motion to vacate within 30 days in superior court. This is a disclosure complaint to the state regulator, to claim exemption against the levies, this is California law work.” “If you are a merchant and have not been sued, and you just want to negotiate a payment plan then you need a negotiator, this merchant has the ability to leverage any disclosure issues under SB 1235 or SB 362.”
A business that cannot pay its obligations to its funders should see a bankruptcy lawyer. A business may only file bankruptcy in a district where it has its principal place of business or principal assets for the majority of the 180 days prior to filing, 28 U.S.C. 1408. For example, a California merchant can only file in four federal districts within California. Subchapter V of chapter 11 of the bankruptcy code creates a simplified small business reorganization for businesses with up to $3,424,000 of debt.
