Why funders call it a "purchase," not a loan
A loan has legal baggage that a sale does not. Most states cap the interest a lender can charge, and in some — New York, for example — charging above a certain rate is criminal usury. Merchant cash advance funders avoid those caps by structuring the deal as a purchase of future receivables: the funder is not "lending" you money at interest, the theory goes, it is buying a slice of your future sales at a discount and collecting them as they come in. Because a true purchase shifts the risk to the buyer — if your sales never materialize, the buyer loses — courts have accepted that a genuine receivables purchase is not a loan and not subject to usury law. That is the whole reason MCA effective rates can run far above what a bank could legally charge.
The catch is that the label only holds up if the deal actually behaves like a purchase. If, in substance, the funder is guaranteed repayment regardless of how your business does, then the "risk" it supposedly took on is a fiction — and a court can treat the transaction as the loan it really is.
The three factors courts actually weigh
When a judge decides whether an MCA is a true sale or a disguised loan, the central question is whether the funder has an absolute right to repayment under all circumstances. Courts in New York and elsewhere have settled on three contract features that answer it:
- Is there a real reconciliation provision? A genuine purchase lets your payments fall when your revenue falls, so the funder shares the downside. A missing, illusory, or purely discretionary reconciliation clause points toward a loan.
- Does the contract have a finite term? A true receivables purchase has no fixed end date — collection continues until the purchased sales come in, however long that takes. A built-in deadline by which the full amount must be paid looks like a loan's maturity date.
- What happens if the business fails? If declaring bankruptcy or simply going out of business is treated as a default that triggers the full balance and a personal guarantee, the funder never really accepted the risk of non-payment — another mark of a loan.
No single factor decides it; courts weigh them together to see whether the funder genuinely took on the risk of your sales drying up.
Why the loan-vs-sale question matters for you
This is not an academic distinction. If a court recharacterizes your MCA as a loan, its sky-high effective rate may exceed the legal usury limit — and depending on the state, a usurious loan can be unenforceable or have its interest stripped out, which can be a powerful defense if you are being sued. The law is genuinely unsettled, though, and you should not bank on it. Some courts — including decisions in New York and a Florida appellate ruling — have upheld properly structured MCAs as true purchases that are not subject to usury law. At the same time, bankruptcy courts and some state attorneys general have looked at MCAs that collect fixed amounts regardless of revenue and concluded they function as loans. The outcome depends heavily on your exact contract language and your state.
What to do if you think your MCA is really a loan
Because the analysis is fact-specific and the stakes are high, this is a place to get a professional read rather than rely on a rule of thumb. Pull your agreement and look for the three features above — especially whether the reconciliation clause is real and mandatory or just window dressing. Keep every version of the contract and your payment records. If a funder has sued you or is threatening to, a small-business or debt-defense attorney can tell you whether a loan-recharacterization or usury argument is realistic in your state; many offer a free first consultation. And weigh it alongside the practical options — honoring a real reconciliation right, negotiating directly, or settling the balance. Settlement applies to unsecured-type business debt, is never guaranteed, and any forgiven amount over $600 may be reported to the IRS, so confirm the tax side with a professional before you commit.