Is my MCA actually an illegal loan? (Usury & disguised-loan defense)

An MCA Isn’t a Loan

A merchant cash advance is exactly what it sounds like: The advance is a lump of cash, and the merchant is you. A provider advances cash to a business and buys future credit card sales, and the payments you make get higher or lower based on how your card sales go. Non-payment risk lies with the provider, unlike a loan.

That’s important because if it’s set up properly, an MCA isn’t a loan. State usury caps on loans don’t apply to MCAs built that way. MCAs were originally an alternative to bank loans for small businesses. But predatory lenders use the term MCA to camouflage loans with usury. They twisted a legitimate product into a way to offer loans with interest rates higher than state limits allow.

Whether the Transaction Is a Sale or a Loan

Most courts would view a merchant cash advance as a purchase of receivables, not as a loan. Whether the transaction is a sale or a loan decides if it’s subject to the law that applies to loans, and specifically whether there’s a legal cap on interest. There’s no exact test. Instead, the court considers a list of factors and decides for itself.

The first factor Courts will weigh is whether the risk of loss remains with the seller (you, the business) or passes to the buyer (the MCA provider).

Next, Courts will want to know if the buyer, the MCA provider, can get back more than principal plus interest; i.e. can they keep everything they collect?

Courts will ask whether you, the seller, still collect the receivables and keep them in your bank account along with the proceeds from your other sales. In a genuine sale, the buyer usually collects them.

The fourth factor is this: Whether the MCA provider is entitled to receive the money no matter what, or if their money goes at risk. A true loan must be repaid absolutely. The principal is protected, not put at risk.

Is the agreement open-ended, or indefinite? If so, then repayment is contingent.

Finally, Courts will ask themselves whether, if you file bankruptcy, the MCA provider can still come after you.

This list isn’t exhaustive, and different courts will look at different criteria. If you’re in court, trying to get usury capped on an advance, it’s incumbent on you, the seller, to prove that it was a loan. But the key factor in determining whether an MCA is a loan is whether the risk of non-payment remains with the seller or not. If your MCA company does, in fact, carry the risk of non-payment (and doesn’t have recourse to you if you don’t pay it back) then it’s not a loan.

The general rule is that usury doesn’t occur unless repayment of principal is an absolute certainty. If repayment of principal plus interest is subject to a risk, charges above legal interest may be allowed, except where the risk is too small to bear a reasonable relation to the charge.

The take away lesson is this: You can call a loan a peanut butter and jelly sandwich, but it’s still a loan. Just because something is named one thing, doesn’t mean it’s exempt from scrutiny. A court can still find a document, even if the parties call it an MCA, criminally usurious.

A Guarantor

Many merchant cash advances have a guarantor. It’s the person who agrees to pay if the business can’t. Having one doesn’t turn an MCA into a loan though. The guarantor’s obligations can’t be broader than the merchant’s. New York Supreme Court said in Platinum that the merchant’s and owner-guarantor’s obligation to repay was not unconditional, because repayment had to come from receivables deposited in the future - so not a loan. In Colonial Funding, a guarantor was required to help deposit receivables into an assigned account, but not to cover shortfalls from personal funds. The court held that because the guarantor did not have an obligation to supplement the receivables, it was not a loan.