Many businesses take out merchant cash advances to get cash fast. If the business is not able to make the payments, the owner has two choices: settle with the funder directly or hire a lawyer. Which way to choose depends more on the contract you signed, not on how much you owe. Merchant cash advances are popular for a reason. It’s basically a way for a small business to get the cash it needs quickly. But even though it looks like a fast solution, those agreements can end up hiding a very, very high interest rate. And that is exactly why, in 2026, the first question to ask is not what you can afford to offer. It is whether the contract you signed might be a loan dressed up as something else.
A merchant cash advance means the funder, which the agreement calls the Purchaser, gives the business, called the Seller, cash up front. In return, the Purchaser gets to collect part of the future receivables. The agreement can provide working capital to small businesses needing quick cash. On paper, the deal is a purchase, not a loan. You can call a contract a “sale of receivables” but that doesn’t mean the court will agree.
An Illegal Interest Rate
Here is why that matters. Usury is not a fancy law school term. It means an illegal interest rate. Not “high.” Illegal. Usury is charging more than the legal limit for interest. In the U.S., there are generally two kinds of usury law: civil usury means the lender can’t charge you more than a set rate; criminal usury means the lender is breaking the law if they knowingly charge above the legal limit. Cross that ceiling, and the loan (or MCA) may be unenforceable. That can be a deal-breaker for your funder - and an advantage for you.
The states decide the laws about usury, and some states don’t have any usury laws. In New York, the statutory cap for interest is 6%, unless the New York Banking Board has authorized a higher rate. In Delaware, however, the interest rate is whatever the parties agree to. So where your agreement falls, and which state’s rules apply to it, can change the whole conversation with your funder.
The Substance of the Agreement
If a court finds that the agreement is a loan, it is subject to the state’s usury laws. Courts look to the substance of the agreement, though, not just the name on it. Is the MCA funder absolutely entitled to be paid back, no matter what? And is there a real transfer of risk? If you sell your receivables to someone, that buyer usually ends up taking the risk if your customers don’t pay. But if the contract says the buyer is entitled to get paid no matter what, even if your customers default, then you’re really borrowing money.
To figure out if an MCA is a loan, the court looks to whether:
- there’s a reconciliation clause in the agreement;
- the contract has a finite term; and/or
- if the deal goes sideways, whether the MCA provider can get recourse in the event the business goes bankrupt.
Those are just a guide, and they don’t necessarily dictate whether it’s a loan or not. Courts don’t follow a checklist, they look at the overall deal, and lawyers can argue all day long about whether it’s one or the other. Since the courts look at the substance of the deal, not the labels, there’s no way to tell from the contract’s terms alone whether this is a loan or not.
If the rate is over what the state allows, the MCA can be voided, and other penalties could follow. In Spig Industries v. Novac Equities, the court said the MCA deals were actually loans in disguise. That made them unenforceable under New York’s usury laws. By the court’s own math, the rates ranged from roughly 91% to more than 800%, and both the low rate and the high rate still fell into the category of usurious rates under New York law, since the criminal usury rate in New York is capped at 25% a year. Even the low end was more than three times the cap.
Read the Agreement Before You Call the Funder
Now think about what that means when you pick up the phone. When a seller negotiates with a funder, directly, without a lawyer reviewing the contract, they might accept terms that should have been challenged as a hidden, high-interest loan, weakening the seller’s strongest bargaining tool. Some business financing agreements might look like loans, which means the business owner could have a usury defense. Whether they do depends on the specific language of the agreement and the state law, and if the business owner signs it without looking into these things, they could end up paying amounts that a court might throw out.
That does not mean every owner needs a lawyer. Some states, like Delaware, don’t limit how high interest rates can go; they let the contract dictate the terms. So if you’re signed up under that state’s law, you might not have a “usury” defense. In that case, calling the lender to negotiate a lower payment might be your best bet. The same is true if your agreement reads like a genuine sale, where the funder actually shares the risk that your customers won’t pay.
If the arrangement sounds like a loan in disguise, and your contract falls under a state like New York with interest rate restrictions, you should definitely get a lawyer to review it. If the state (like Delaware) doesn’t have those limits, or it’s a true purchase arrangement and the funder takes genuine risk, you may be able to negotiate it yourself. Either way, read the agreement before you call the funder. And if you honestly can’t tell which kind of deal you have, you should probably have a lawyer review the whole thing to see what it really is. If you do end up in court, you’ll need an attorney.
