Imagine opening your salon in January 2026, eager to serve the community and grow your business. You expect a busy season, and your projections are optimistic. But instead, the months that follow are filled with disappointment as your actual results fall far short of expectations. The chairs are emptier, but the merchant cash advance still gets paid first. Repayments through ACH debit are made daily, and they come out even if the salon has poor sales in the month, just as they would in a busy one. Once a few slow weeks stack up and the variables of good day vs bad day cash flow happen, suddenly it becomes impossible to pay the merchant cash advance. Now, as the owner, you’re staring down a decision: keep the lights on or close your doors for good.
A merchant cash advance is the business version of a payday loan. The difference is that when you’re a business owner, the ‘paycheck’ comes from your daily sales, and a repayment is debited from your business bank account every business day. Why take one? The reason isn’t much different than someone taking out a payday loan. Short-term access to working capital or immediate funds is the goal. These advances are easy to get, and that is the trap: once a business heads down this road, it is very hard to climb out of the hole. No business can survive on interest rates of 50%, 100% or 300%.
Courts Are Split
So is there a way out? The courts are split, but there are opinions that merchant cash advances are usurious. Some have protected the funders; see, for example, In re R&J Pizza Corp. (Bankr. E.D.N.Y. 2020). But a Montana bankruptcy opinion from September 2021, CapCall, LLC v. Foster (In re Shoot the Moon, LLC), went the other way. Even if a contract is labeled a “purchase” it can in fact be a loan. The transactions in the Shoot the Moon case were factually loans, even though the contracts called them a sale of receivables.
The case involved nineteen limited liability companies that owned and operated sixteen restaurants, operating in Montana, Idaho and Washington. These entities came under financial strain and took out eighteen separate merchant cash advances from CapCall. All of the documents were those of CapCall, including the merchant agreements, the confessions of judgment, personal guarantees from the principals and UCC-1 financing statements. CapCall provided the companies immediate cash, in exchange for a percentage of their future receivables, and took repayment through fixed daily bank account debits until the amounts were satisfied. In October 2015 the entities consolidated into Shoot the Moon, LLC, which filed for Chapter 11 the following day. A dispute over $228,449.93 in credit card receipts ensued, and the trustee, Jeremiah J. Foster, alleged that the transactions were disguised loans.
Whether an Agreement Is a Sale or a Loan
How does one determine whether an agreement is a sale or a loan? A loan is money that a business borrows from someone else, and then has to pay back according to an agreement. The court weighed factors such as whether the buyer has recourse against the seller, whether the seller keeps servicing the accounts and mixes the receipts with its operating money, whether the buyer can change the pricing on its own, contract terms and the parties’ conduct. No one factor was dispositive. What unified the factors was risk. In a true sale, the risk of loss is transferred to the buyer. In a disguised loan, the buyer arranges other means for repayment. The court concluded that the determination did not turn on whether New York or Montana law applied since both examined substance over form.
First, the court found that CapCall’s blanket lien pointed to a loan. CapCall’s agreements took a security interest in tax refunds, patents, trademarks, inventory, equipment and fixtures, and their UCC filings provided the collateral was “all assets of the Debtor.” If CapCall really was just a buyer, they would purchase the receivables and not subject the debtor to the blanket lien. All assets of the merchant are not really what was purchased. It sounds like a secured lender not a purchaser. Then there was the wording: the restaurant entities were referred to as “debtor” in the agreement when it could have simply been “seller”. A debtor is someone who owes money.
On top of that, the owner signed a personal guarantee, and both the restaurant and the owner signed a confession of judgment in favor of the funder for a fixed “debt” and interest rate of 16% per year. And the agreement included a power of attorney in favor of the funder. It also allowed acceleration of the full uncollected amount and debits from deposit accounts. CapCall’s witness testified that it never enforced those rights. The judge was not impressed. Not enforcing a right does not erase it, the agreements expressly preserved those rights, and CapCall had drafted them.
Then there was how everyone behaved. The parties’ email messages referred to “loans” and “balances” and “terms,” and the owner treated the deals like promissory notes signed for bank loans. Payments ran through the account of an entity that was not a party to the agreements, money got mixed together, and CapCall knew it. The deals were “stacked” or “rolled,” with later advances paying off earlier ones. That makes no sense in a sale. The court said the language in the agreement that it was not a loan was “ipse dixit.” You can call yourself whatever you want, but you’re not fooling anyone.
The court applied Montana usury laws and entered a judgment against the cash advance company for $1,216,685. The court also entered a judgment against the cash advance company for a total of $1,129,071 in preferential transfers received in the 90 days before bankruptcy, gave all disputed credit card receipts to the bankruptcy trustee, disallowed the claim of the cash advance company, at least for now, and awarded the bankruptcy trustee $424,756.58 in attorney fees under Montana’s reciprocal fee statute. CapCall appealed to the U.S. District Court in Montana.
You as a Salon Owner
What do you as a salon owner need to know? It depends what you signed. When a business signs an agreement that looks more like a loan than an agreement to purchase receivables, it could be treated as a loan. That’s not always the case, but it shows that the label on the contract is not the end of the story. Look at the characteristics of the contract: is there a lien on all assets? Is there a personal guaranty? A confession of judgment? Do you see the word “debtor” in the agreement? Did the business “stack” or “roll” the cash advances? Those were the signs that led the court to determine that it was a loan, not a purchase agreement.
A court can look at a contract and say that it’s not a purchase agreement, but a loan. One way it can do that is if the label is not matched by the actions. What the judge was really looking at was the character of the transactions, not the title of the contract. Whether other courts follow that reasoning, and what happens on appeal, time will tell. But the opinion changes the dynamic for merchant cash advance funders and the businesses on the other side of them.
