Many small business owners turn to Merchant Cash Advances (“MCAs”) when traditional financing is unavailable. MCA companies often advertise quick approvals, minimal underwriting, and funding within days. For businesses facing cash flow problems, that can sound like an attractive solution.
However, many business owners are surprised to learn that MCA companies typically insist that they are not making loans at all. Instead, they claim to be purchasing a portion of the business’s future receivables.
This distinction may sound like legal semantics, but it can have significant consequences when disputes arise.
What Is a Merchant Cash Advance?
In a traditional loan transaction, a lender advances money, and the borrower promises to repay a fixed amount over time, usually with interest.
An MCA transaction is structured differently. The funding company provides an upfront payment to the business in exchange for the right to receive a percentage of the business’s future receivables. The MCA company then collects payments, often daily or weekly, from the business’s bank account.
For example, a business may receive $50,000 today and agree to remit $75,000 from future receivables over time.
Because the transaction is characterized as a sale of receivables rather than a loan, MCA companies often argue that state usury laws and lending regulations do not apply.
Why Does the Loan Question Matter?
The answer can dramatically affect a business owner’s legal rights.
If an MCA is truly a purchase of future receivables, the funder (the MCA) would assume some risk that the receivables may never materialize. In theory, if business revenues decline, the funder’s collections should also decline.
In practice, many MCA agreements contain provisions that resemble traditional loans. These agreements often include:
- Fixed daily withdrawals;
- Personal guarantees;
- Confessions of judgment;
- Default provisions triggered by non-financial events;
- Security interests in business assets; and
- Aggressive collection remedies.
As a result, courts around the country have increasingly been asked to determine whether certain MCA agreements are genuine receivables purchases or disguised loans.
Factors Courts Often Consider
Although the law varies by jurisdiction, courts frequently examine several key factors:
- Whether payments fluctuate based on actual receivables;
- Whether the funder bears a meaningful risk of nonpayment;
- Whether there is a finite repayment term;
- Whether the business has a contractual right to seek reconciliation when revenues decline; and
- Whether the funder has recourse if receivables are never generated.
The more risk the funder shifts back onto the business, the more likely a court may view the transaction as a loan rather than a true sale of receivables.
Why This Matters in Bankruptcy
The distinction between a loan and a receivables purchase can become especially important when a business files bankruptcy.
Bankruptcy courts frequently look beyond the labels used in a contract and focus on the economic reality of the transaction. If an MCA is determined to be a disguised financing arrangement, the funder may be treated as a creditor rather than the owner of receivables.
That distinction can affect claim treatment, collection rights, lien validity, and the debtor’s ability to reorganize.
Before Signing an MCA
Merchant Cash Advances can provide immediate liquidity, but they often come with significant costs and legal complexities. Business owners should carefully review the agreement, understand the true repayment obligations, and consider whether less expensive financing alternatives are available.
If your business is struggling with MCA obligations, lawsuits, or cash flow issues, legal advice may help identify defenses, negotiate a resolution, or explore bankruptcy options that can provide meaningful relief.
At Lipton Law Group, LLC, we help Massachusetts business owners evaluate merchant cash advance agreements, defend collection actions, and explore restructuring and bankruptcy solutions when debt becomes unmanageable.