These days money is tight, and a lot of business owners are facing tough choices. That’s why merchant cash advances have gained popularity. This type of financing is pretty common for mid-sized businesses that can’t qualify for traditional bank financing. By one industry estimate, the MCA market size reached $19.65 billion in 2025 and is projected to hit $26.87 billion by 2030. However, the MCA industry has come under scrutiny, especially when the business files for bankruptcy protection. When a Chapter 11 merchant files for protection, one of the big questions for a court is whether a so-called “sale of future receivables” is in fact a disguised loan. That question can make or break the bankruptcy case for both the business and the MCA funder.
An MCA provider advances your business money upfront, in exchange for a percentage of your future credit card receivables, discounted at a certain rate. You repay the advance (through daily or weekly ACH withdrawals) from your bank account, usually as a percentage of your projected monthly receipts. For example: If your business was advanced $90,000 in exchange for $140,000 of receivables, you’d repay at $4,000/day. That $50,000 difference represents the funder’s profit, and the effective annual interest rate can be very high — above 300% in some cases.
Purchase of Receivables
The funder’s position is simple: Your MCA looks like a loan, feels like a loan, but it is not a loan, it is a purchase of receivables. In court, though, it’s not what you call it — it’s what you do. Despite having a receivables purchase label, a funding agreement can be re-characterized as a loan if it is an absolute obligation to repay and if nearly all the risk is put on the merchant. In a true sale the funding party bears the risk in the event that the receivables are not collected. The three main factors that a court will look at are (1) if there is a reconciliation provision, (2) whether the funding agreement has a finite term, and (3) if there is any recourse to the merchant in the event that the merchant files for bankruptcy. If the funding party is “absolutely entitled to repayment under all circumstances,” then the funding agreement is a loan.
A few other things courts say count are: an agreement says if you default they can collect all their money right now; the agreement says if you default or file for bankruptcy the merchant’s guarantor (the owner) is on the hook to pay too; the agreement says they have a security interest in the merchant’s assets. All that points to it being a loan.
So how do you spot an MCA in disguise as a loan? One red flag is a reconciliation clause that never obliges the funder to give back what it collected over the agreed % of revenue. It also won’t allow the merchant to get a refund while the merchant is “in default” – which could be just missing a daily payment or violating a solvency covenant. And you’ll also see a de facto fixed term, where you divide the amount owed by the daily payment, and that gives you an end date. Other warning signs of a loan agreement are: personal guarantee of owner; security interest in business assets; agreement never specifies which receivables were bought, and no limits on how the merchant uses the proceeds so long as payment is made. Courts have called that ‘a significant indicator of a loan.’
Ch 11 Case
So why is recharacterization such a big deal in a Ch 11 case? If it’s really a usurious loan, payments to the funder could be clawed back under the constructive fraudulent transfer doctrine, 11 U.S.C. 548(a)(1)(B). Look at the Anadrill Directional Services case – the court let the trustee’s claims proceed – if the MCA is criminally usurious, it’s void under New York law, and the debtor got no reasonably equivalent value for the payments. (A void contract has no legal effect, so there is no legally enforceable right under it.) The debtor in that case even owed the funder $1,016,000 after receiving only $650,000.
Payments can also be pulled back as preferences under 11 U.S.C. 547. In J.P.R. Mechanical, the court granted summary judgment to the trustee. The agreements and conduct indicated the MCA was in fact a debt, and payments made within 90 days of bankruptcy when the debtor was insolvent were avoidable. The funder there had also filed a proof of claim and called itself a ‘creditor’ with a ‘claim’ for money owed — it practically admitted it was a creditor and couldn’t deny it. Its ‘ordinary course of business’ argument also failed: payments far larger than the normal daily amounts weren’t ‘ordinary’.
“Recharacterizing” what an MCA funder bought — that’s the name of the game in the recent reorganization of Butler Trucking. The plan of reorganization there, unopposed, treated MCA funders as holding debt that’s totally unsecured because it’s junior in priority to the priority liens of senior secured lenders. The court noted that this only works if the senior secured lenders’ liens are worth more than the value of all collateral. Butler Trucking made one more point. The plan rejected all executory contracts, and the MCA agreement to sell future receivables is arguably an executory contract. So the funder’s exposure here is just a prepetition unsecured claim for breach. See 11 U.S.C. 365(g)(1) and 502(g).
Post-Petition Receivables
Then there are the receivables your business earns after it files. You can’t sell what you don’t have yet. Future receivables become part of the bankruptcy estate, not the MCA funder. In the IVF Orlando case, the judge ruled, “One cannot sell more than one owns,” adding that when the MCA company signed its agreement, the debtor didn’t have any future receivables, only a hope. The bankruptcy code confirms this: 11 U.S.C. 552(a) says property acquired after filing is not subject to a prepetition security agreement lien. Even if the funder did have a security interest, that wouldn’t reach post-petition receivables.
For owners of businesses in distress: read the deal documents that you signed and see how the funder behaved. The true character of the transaction matters. If it resembles a loan in substance — and especially if the effective interest rate exceeds your state’s usury cap — Chapter 11 bankruptcy could discharge or restructure it, possibly recovering payments already made. Get a lawyer who knows this stuff as soon as you can. Funders, for their part, may have to defend against avoidance actions and being demoted to unsecured creditors.
