Ask a merchant cash advance company whether its product is a loan and you will get a firm no. True, the papers you signed say the company bought your future receivables in a “true sale.” When the ink is dry, reality sets in. The money comes out of your account every business day, and it feels exactly like paying back a loan. In 2026 that question still matters, because the honest answer is that the label in the contract is not the end of the story. Courts looking to determine the relationship between the lender and the borrower look past the label at the contract itself, how the parties behave in their daily interactions with each other, and upon who bears the economic risk associated with the sale. If the risk lies with the business, then a court may decide the arrangement is a loan, no matter what the label or contract says. The effective rate in such instances may be anywhere from 50% or higher to 300% a year.
Start with how the deals that have ended up in court were built. The funder says it is buying your future receivables. The agreement states it is a true sale. You agree to have a daily fixed amount taken out of your business checking account, no matter how much money you collect each day, even though the agreement says you will pay an estimated percentage of daily collections. If you are not able to make your daily payment, the ACH will be rejected and you are in default. You will grant a security interest in your receivables and other business assets, guarantors can be pursued, and the agreement states events of default like you would see in a loan. In other words, the provider keeps taking the fixed daily payments no matter what. If sales go down, it doesn’t reduce the payment. Most of these agreements also include a reconciliation clause meant to square the payments with what you actually collected, but the funder usually has several ways to avoid running that calculation, and in the cases discussed below the failure to do it became part of the customers’ claims.
Why does it matter what the deal is called? Because where a court finds that a funding provider is not in fact purchasing an account receivable from a client, but in fact, is providing a loan (rather than purchasing a receivable) the funding provider is subject to various claims that are not available under a true receivable sale from customers (or their bankruptcy trustee) including usury and Racketeer Influenced and Corrupt Organizations Act (RICO). Both usury and RICO require that there be a loan and in Haymount the court found that because the implied rates were far in excess of 50% which was twice the New York criminal usury rate, the complaint had adequately pled that the debts were unenforceable “unlawful debts” under RICO.
Three Reported Decisions
The leading examples are Fleetwood Services v. Ram Capital Funding, Haymount Urgent Care v. GoFund Advance, and Lateral Recovery v. Queen Funding, three reported decisions out of the Southern District of New York. They were decided in 2022, and all involved merchant cash advance customers suing funders under usury and RICO laws. To be precise, Fleetwood was a summary judgment decision, and Haymount and Lateral were decisions on funder’s motions to dismiss. But all three either held that contracts should be considered loans, or assumed that they were loans for the plaintiff’s claim and theories to proceed. And they all reached that conclusion despite the “true sale” provisions in the contracts.
So why is a merchant cash advance so expensive? Because these deals are structured to achieve a targeted economic yield in a structure where the provider’s own risk of loss is as limited as possible. Because the MCA provider says it is buying receivables rather than lending, the provider argues that usury laws don’t apply. For cases where courts did calculate the interest rate buried inside the deal, the rates came out to 278.5% (Fleetwood); over 50% a year (Haymount); and between 100% and 300% in several other agreements (Lateral). These rates would be unlawful under the usury laws of most states. If payments get delayed, you carry the risk - the provider still gets the same fixed amount regardless of how long collection takes. In at least one of the cases, the provider may not have given you the full amount they promised, but they were still paid as if they had.
Courts have also paid attention to how funders behave when a business starts to struggle. When Fleetwood requested a temporary suspension of the fixed daily ACH payments due to decreased collections, a collections agent replied, “UNFORTUNATELY … WE DO NOT OFFER ‘BREAKS’. DOING THAT WOULD PUT YOU IN AUTOMATIC DEFAULT,” and continued to withdraw funds from the account. The provider failed to perform reconciliations. In affidavits from other customers of the same funder, which it never disputed, one customer who requested a reduction in payments in order to weather a seasonal downturn was told “We will take everything from you…. We are from New York…. Don’t mess with us.” Another customer, whose clients owed them money, asked for a one-week reprieve, and was told “I don’t care about your problems,” and “I’ll default you before you can get out of the bathroom.” Conduct like that does not decide a case by itself, but it does not help a funder that is already on shaky ground.
Who Takes the Long Term Economic Risk
What does decide it? It’s about who takes the long term economic risk. When reviewing all the facts of a deal including the documents, business relationship between the parties, and the economics of the deal, if the risk is more on the side of the customer then it looks more like a loan, and if the risk is more on the side of the business that is providing something, then it is more likely a purchase. As the Fleetwood court put it, if the provider bears the risk that the account debtors don’t pay and the business’s debt is extinguished, it is a purchase; if the business remains liable and bears that risk while the provider holds only a security interest, it is a loan. Look again at the fixed daily debits, the guarantees and the default clauses, and it is not hard to see which way those scales tip.
Lawmakers have noticed too. A number of states have adopted disclosure requirements for commercial finance deals, most notably New York and California, and these rules apply to non-exempt MCA providers and factors whether the transaction is considered a loan or a true sale. In California, the rules went into effect December 9, 2022. New York’s requirements were tied to the Department of Financial Services finalizing its regulations. The courts are also making it clear that they will find that MCAs are loans if the agreement does not truly transfer the risk to the provider, or if the provider does not act in a commercially reasonable manner. The result? Usury claims and RICO claims will potentially follow, and the treatment of the advance may change if the business files for bankruptcy.
Read the Agreement
None of this means your advance is automatically a loan, or that you can stop paying. For you struggling owners: read the agreement, and compare it to what the funder did. Is the daily withdrawal a fixed amount regardless of collections? Did the funder ever reconcile the accounts as promised? Did you sign a personal guarantee or grant a security interest covering all your assets? Did the funder refuse to adjust payments because your sales had slowed? All of these elements came up in those cases. If you think you’re in a situation where the funder might be doing this to you, talk to a lawyer (and don’t just assume that because the agreement says “true sale”, you don’t have options).
