Owners who are behind on an advance ask us this constantly, and the short answer is yes: it is possible that a lawyer could successfully argue that the advance is a usurious loan. People argue this all the time, and the stakes are high. In New York, the criminal usury rate cap is 25% interest per year. So, if the merchant wins that argument, criminal usury is a complete defense and the funder can’t enforce the agreement. The problem, though, is that NY courts have developed a body of caselaw for “loan” v. “purchase of future receivables” so it isn’t automatic.
What an MCA Is Really Saying
Let’s step back and see what an MCA is really saying. It’s called a revenue purchase agreement (RPA), so that’s what we’ll use. The funder buys from the merchant a “purchased amount” of future receivables at a discount (a “purchase price”). The merchant repays that, not as a loan, but as a “specified percentage” of future receivables, which can be daily, weekly or monthly. For convenience, a fixed “remittance amount” is established, which is simply a good-faith estimate of the percentage, based on the average receivables before the funding.
For a transaction to qualify as an advance (as opposed to a loan) the repayment amount must be subject to reconciliation (adjusted) should the merchant request it. This means the payments must follow the actual receivables amount should the business slow down, even if that means indefinite delivery of said payments. It is further reduced to zero should the business completely fail. Still, a lot of merchants argue it’s really just a disguised loan.
Three Key Factors
So how does a court tell the difference? In a 2020 case from the Second Department, the court said there were three key factors.
- First, does the agreement provide for reconciliation?
- Second, does it have a fixed end date?
- And third, does the lender have recourse if the business files bankruptcy?
This test has been used for the last six years in the Second and Fourth Departments and it was also adopted by the federal Second Circuit Court of Appeals. In February 2026, the First Department adopted the test, and in recent cases the courts applied it strictly, and found that the agreements were real purchases of receivables.
Here’s an important lesson from a 2025 case in the Second Department: if you want to challenge the reconciliation factor in your contract, you have to actually do the reconciliation and provide evidence that you did it, otherwise the court won’t even look at it. In other words, the court won’t speculate whether a funder would have granted a request; the merchant has to prove it asked and got a denial. If a merchant never asks for reconciliation at all, it can’t later say the clause is illusory. Bottom line: if sales dip, make a written request for reconciliation and keep documentation.
But sometimes, agreements that don’t meet all three factors will be recharacterized as loans. In one 2023 case, the Second Department found that an agreement for the purchase of future receivables was really a loan because the funder was “under no obligation” to reconcile payments. In a 2024 case, the Fourth Department denied a funder’s motion to dismiss on all three factors: the reconciliation provision looked illusory; the funder had sole discretion to adjust the daily payment amount and faced no penalties for ignoring that provision; the term of the advance was impliedly finite since the daily payment was allegedly set to allow the funder to recover its target return within a predetermined time; and the funder had recourse because it could keep withdrawing daily payments even when they exceeded the merchant’s sales.
The First Department took its own route for years. Up until February of 2026, it used to ask, “was this a loan?” by looking at the facts more than the paperwork, even if the paperwork said that it wasn’t. In two cases involving the same notorious funder, it looked past the formal reconciliation clause and weighed evidence that the funder refused to let the borrower reconcile the numbers, the daily payments weren’t a good-faith estimate of what the receivables would actually be, bankruptcy or a bunch of nonpayments counted as an event of default, and if the merchant couldn’t pay or was in bankruptcy then the personal guaranty could be collected. And in 2025, a separate First Department ruling noted that a guaranty giving security interest in all personal property on default weighed toward a loan; but a clause collecting only a percentage of daily receipts weighed against.
This is one area of the law that’s still evolving. Two dissenting justices in the Fourth Department would apply a different test when you have a fixed daily or weekly payment, referred to as an ‘estimate’: (1) first, whether the estimate is reasonably based on the merchant’s previous or anticipated sales, not pulled out of thin air; (2) not merely whether a reconciliation provision is contained in the agreement but whether it’s illusory, that is, whether the merchant actually has a practical ability to reconcile. The Third Department hasn’t yet addressed such agreements in a published opinion. More development of this area can be expected from the appellate courts, perhaps even the Court of Appeals.
There’s this idea that if the interest rate is too high it’s automatically usury and a checkmate. The reality is it’s a real argument you can make, but it’s very fact-specific, and in most cases how the contract is written matters a lot. The facts and evidence can make a difference too. For example, did you actually ask the funder to reconcile when your sales dipped, and how did the funder respond? Was the daily payment a genuine estimate? Does bankruptcy trigger a default? Is there a personal guaranty? Those are questions a lawyer has to review in the context of your specific contract. In the meantime, the payments are still being deducted from your account.
A Debt Settlement Company
That is where Delancey Street comes in. We’re a debt settlement company, not a law firm. If a situation calls for litigation, we refer the owner to an independent attorney. Our senior advisors negotiate with MCA funders to reach a settlement for less than the total balance due; we don’t offer another loan. The first consultation is free and confidential; if there’s a less expensive solution or the owner needs bankruptcy counsel, we say so on the first call.
