For a retail shop, a merchant cash advance can backfire during slower months. If the business doesn’t have enough cash to pay back the advance each week, it will start to struggle. Once that happens, it can be tough to recover. If you haven’t planned ahead, the slow season can put your cash flow on pause, leave you struggling to keep the lights on, and maybe even force you to make tough choices about your future.
Merchant cash advances can be incredibly tight because they are tied to your sales, and when sales start to slow, the store’s cash flow can shrink fast. After months of slim sales and tight margins, each payment reduces your working capital, or the money you have to run the business, by that amount. It’s enough to keep you up at night. Too many merchants sign contracts without fully grasping the terms, leading to unexpected financial strain. So before you can ease the pressure in 2026, you need to know what you actually signed, because that is where MCA debt relief starts.
A Loan or a Sale of Future Receivables
A Merchant Cash Advance Agreement is a deal where someone gives a business a lump sum of money upfront in return for some of the company’s future income. The person providing the money is the “purchaser” and the business getting the money is the “seller”. These agreements are often used to give a business working capital, especially when that business is a small business. The reason these agreements exist is that sometimes a business needs money and they need it quick. While a merchant cash advance agreement may seem like the perfect way to get the money you need, these agreements often have very high interest rates. Unfortunately, the terms of an MCA agreement are often equivalent to signing a loan agreement with a high, albeit hidden, interest rate.
That label of “sale” is not just paperwork. The difference between a loan and a sale of future receivables is whether the agreement is subject to the state’s usury laws. If the transaction is a loan, it is subject to usury. If it is a sale of future receivables, it is not.
Usury means charging more interest than the law allows. There are civil usury statutes and criminal usury statutes. Civil statutes bar a lender from charging more than a certain rate of interest. Criminal statutes are triggered when a lender knows he’s charging more than the statutory rate of interest. Usury laws differ from state to state. And not all states have usury laws. New York, for example, limits the interest rate to 6%, unless the Banking Board sets a higher cap, and the criminal usury rate is 25% per year. Delaware doesn’t have a cap, but instead goes by the rate in the contract. In other words, which state’s law applies can make a huge difference.
Courts have debated long and hard the question of whether merchant cash advances are properly characterized as sales of future receivables or loans in disguise. The courts are split on this issue. Here’s how a court determines if it is a loan or a sale of future receivables:
- (1) Is there a reconciliation provision?
- (2) Does it have a finite term?
- (3) Is there recourse if the merchant goes bankrupt?
These three factors are not required; they are just a guide to the court’s analysis.
When a merchant cash advance contract is challenged in court, courts focus on the agreement’s reality, not how it is labeled. If the funder must always be repaid no matter what, the deal looks like a loan. The court will also consider whether risk was truly transferred, since when an advance is a true sale of future receivables, the funder - not the business - should bear the risk of customers failing to pay. There is no bright-line test. The MCA may look like a sale, and yet a court may still determine that it is a loan. For a retailer in a slow season, when customers simply are not buying, that question of who carries the risk is not academic.
Disguised Loans
The court in Spig Industries, LLC v. Novac Equities LLC examined if certain merchant cash advance agreements were actually disguised loans. It found that these agreements were indeed loans and that they were unenforceable under New York usury law. According to the court, the interest rates in these agreements ranged from approximately 91% to over 800%, exceeding New York’s 25% criminal usury cap. If a deal is found to be a loan charging more than the state allows, the contract can be void or subject to other penalties. Even so, this ruling gives serious pause for a retailer to look very closely at their merchant cash advance contracts.
Negotiate with the Funders
This is where MCA debt relief comes in. A business-debt settlement firm is not a law firm. A business-debt settlement firm can review your merchant cash advance agreements, come back and say, “Here are your agreements and here are the terms - what they say, how they’ve been structured - and that’s what we’re going to use to negotiate with the funders.” They can review the terms of the contracts - is there a reconciliation provision? A finite term? Is there recourse if the merchant goes bankrupt? There’s no guarantee that any particular agreement is a loan under the usury law, but the business owner can still talk to an attorney to get the question answered, as it’s ultimately for a court to decide.
Deteriorating sales don’t necessarily mean things can’t be salvaged. If the slow season has you behind, review the agreement and examine your cash flow. Then carefully research each and every MCA you are paying, not just the one that worries you most. The goal is a payment arrangement your store can carry until the busy months return. You’ve worked too hard to let your business take a hit because you made a bad financial decision.
While a MCA can save your business during a tough season or a rough patch, it can also haunt it. But knowing the risks and the benefits of an MCA can give you an idea of what kind of deal you can set up with a funder, and how much room you may have to change the one you already have. If you are unsure whether your agreement is really a loan, talk to an attorney. This content is general information and should not be used as legal advice.
