Merchant Cash Advance Debt
Most small business owners can resolve their merchant cash advance debt without filing for bankruptcy, but there is no magic trick to making the debt go away. The business owner can negotiate new repayment terms, refinance the debt at lower interest rates, find a way to pay back the cash advance in a lump sum for less than the total balance, or fight the cash advance in court and argue that it was an illegal loan in disguise. Some of these options may not be available to the business owner depending on certain factors. The business’s ability to generate money, the wording of the contract, the state that the business owner and funder are in, whether the business owner has signed a personal guarantee, and whether the funder has already sued the business owner or has obtained a judgment against them are all factors that can impact the feasibility of an option.
If It Is Still Viable
The first thing a business should determine is if it is still viable. A viable business is a business that is still making enough money to pay all the expenses. Viable businesses are the best candidates for restructuring or refinancing the debt, preferably before the first payment is missed. A missed payment is usually considered a default on an MCA contract, in which case the funder could demand the entire balance to be paid immediately. If the business is not making enough money to afford the reduced payments, it may be better for the business to try a settlement or contract challenge. Business owners who signed a personal guarantee will have to consider their personal liability, as the funder can still pursue a personal guarantor even if the business has been closed.
Whether an MCA Was in Fact a Loan
MCAs are sold as a ‘purchase of future receivables’, as opposed to a loan. In 2020, the New York appeals court in the LG Funding v. United Senior Properties of Olathe case came up with a 3-part test to determine whether an MCA was in fact a loan or not. The test would determine whether the contract included a ‘true’ ‘reconciliation clause’ to reduce payments if the business is low on sales, whether the contract has a specific date that it ends on, and whether the funder can collect even if the business goes bankrupt. In this case, the funder could only reduce payments at its ‘sole discretion’ and the funder treated the company bankruptcy as a default. The court allowed the merchant’s usury defense to proceed.
One clear example of the application of the LG Funding test is Fleetwood Services v. Ram Capital Funding. Fleetwood borrowed $100,000 and had to pay back $149,900, deemed by the court as interest exceeding 400% APR. The payments could be changed, if at all, at the discretion of the funder, guarantors could not be released in bankruptcy and the funder made no actual reconciliations. The contract was deemed a usurious loan in 2022 by a New York federal court which was affirmed in 2023 by the Second Circuit Court of Appeals. The impacts of such a finding were outlined in Adar Bays v. GeneSYS ID (2021). That case was decided by New York’s highest court, finding that a loan that crosses the 25% criminal usury limit is not just voidable, but completely void, even for corporations, including the principal. What ultimately matters is the clause in the contract selecting which state’s law governs the transaction and in which state the action will be filed.
A challenge to usury is a bargaining chip, not an automatic win. The merchant has the burden of proof that the transaction was a loan. A contract that demonstrates clear “real reconciliation” and with no recourse in bankruptcy is likely to be held to be a valid sale. LG Funding also ruled that criminal usury can only be brought as a defense in a lawsuit against a business, and may not be used as a counterclaim. However, in practice, the risk of a successful recharacterization mainly helps merchants negotiate a lower price from a funder as a settlement, instead of wiping out the debt in its entirety. Confessions of judgment (COJ) – clauses that allow funders to get a judgment against a merchant without having to bring a lawsuit – are under siege.
State Law Protections
Since August 30, 2019, New York’s Civil Practice Law Rule 3218 no longer allows a COJ against someone who does not reside in New York. A COJ must be filed in a county where the signer resides, and a business “resides” in each county where it has a place of business. A judgment also may not be entered more than three years after a COJ was signed. The amendment does not bar a funder from bringing a normal lawsuit in New York, so out-of-state merchants remain vulnerable to lawsuits in New York.
Some merchants can use state law protections. Texas House Bill 700 makes a confession of judgment clause and similar agreements void and unenforceable in sales-based financing agreements, and it starts to take effect on September 1st, 2025. The bill also prevents any automatic debit from the merchant’s bank account, unless the funder has a perfected security interest in the account. Funders and brokers are required to register with the Texas Office of Consumer Credit Commissioner on or before December 31st, 2026. The state may seek penalties of up to $10,000 for violating the state law. Merchants will not be able to sue companies under HB 700. California SB 1286 provides debt collection protections for commercial debts that are $500,000 or less that are entered into or assigned on or after July 1st, 2025.
Government Enforcement
The threat of government enforcement has also put MCA companies on the back foot in negotiations. In January 2025, the New York Attorney General (NYAG) secured a judgment of $1.065 billion against Yellowstone Capital and 25 affiliated entities. It found that while the firm’s contracts stated that repayments could be flexible, in practice they collected fixed daily sums at interest rates of up to 820%. As part of the deal, over $534 million owed to the firm by over 18,000 businesses was forgiven. Some judgments were vacated and some liens were terminated, and the firm was banned from the industry. In 2022, the Federal Trade Commission (FTC) permanently barred RCG Advances, which operated under the name of Richmond Capital, and its owner from the MCA space. That order included over $2.7 million in customer refunds, as the FTC alleged that the firm was illegally withdrawing funds and making threats against business owners.
FAIR Business Practices Act
New York’s FAIR Business Practices Act, signed December 19, 2025 and effective February 17, 2026, lets the Attorney General pursue unfair and abusive practices, not just deceptive ones. It also loosens the old requirement that the conduct target consumers, though how far that change reaches is still disputed. The Attorney General used the new law in June 2026 to sue Rapid Ruling, an arbitration service allegedly built with an MCA company’s help. The suit says Rapid Ruling handled about 3,000 MCA arbitrations in three years, 97 percent with no small business appearing, and that funders turned the awards into court judgments. Merchants should check whether their contract names a private arbitration forum.
Costs Beyond the Payoff Check
Settlement carries costs beyond the payoff check. Debt relief companies that take MCA accounts commonly charge settlement fees in the range of 15 to 25 percent. The IRS generally treats forgiven debt as taxable income, whether or not a Form 1099-C arrives. In the IRS’s own example, settling a $1,000 debt for $400 creates $600 of canceled debt income. A sole proprietor reports forgiven business debt on Schedule C. An owner whose total liabilities exceeded the fair market value of all assets just before the forgiveness may exclude income up to that shortfall by filing Form 982.
Public Lien Filing
Paying off or settling an MCA does not automatically clear the public lien filing, and an old lien can block a new bank loan. Under UCC section 9-513, once nothing remains owed, the merchant can send the funder a written demand. The funder then has 20 days to file or deliver a termination statement. New York’s version, updated in June 2026, requires the demand to be signed. If the funder misses that deadline, UCC section 9-509 lets the merchant file the termination itself. A funder that ignores the demand faces the same liability as one that filed an unauthorized financing statement.
