The Breach Claim Is Not the End of the Analysis
A merchant cash advance funder filing suit for breach of contract is asserting a legal conclusion, not a fact. Whether the agreement was actually breached, whether the agreement is enforceable as written, and whether the funder’s conduct created defenses that offset or eliminate the claim — these are questions the lawsuit does not answer. The claim opens the case. The defenses determine its outcome.
1. Failure to Remit Agreed Daily Withdrawals
The most basic MCA breach claim is that the business stopped making the agreed daily ACH payments. The funder presents the agreement, the payment schedule, and the bank records showing the payments ceased. The claim requires relatively little legal work to establish, and most courts will grant summary judgment on the underlying breach if no defense is raised.
The defense begins not with the payment history but with whether the agreement was valid in the first place. If the contract is recharacterized as a loan rather than a purchase of receivables, the usury analysis applies and the funder’s right to collect anything may be compromised. In LG Funding LLC v. United Senior Properties of Olathe, a New York court examined precisely these factors to determine whether the MCA was a disguised loan.
2. Breach of the Reconciliation Provision
Most MCA agreements include a reconciliation clause that allows the business to request an adjustment of daily withdrawals when revenue declines. This clause exists to preserve the purchase-of-receivables framing, which is what keeps the contract outside usury law. When funders ignore or refuse reconciliation requests, or when the provision is written to be practically impossible to invoke, the business may have a counterclaim that the funder breached first.
A funder that cannot demonstrate its reconciliation provision was genuinely available and honored faces difficulty arguing the contract was a true sale of future receivables rather than a fixed repayment loan. Courts in New York and other states have held that a reconciliation provision that exists only on paper, never applied in practice, weighs toward recharacterization as a loan.
The reconciliation clause is the fulcrum. Both sides know it, which is why funders draft it to look real and why attorneys examine it to determine whether it was.
3. Unauthorized Account Change
Many MCA agreements define an unauthorized change of banking account as a default event, and funders sometimes file breach claims based solely on this ground, separate from any payment failure. The argument is that the business moved funds to a different account to evade daily withdrawals, triggering the default clause.
The defense depends on the facts: whether the account change was disclosed, whether it was required by circumstances outside the business’s control (a bank closure, an account compromise, a legitimate restructuring), and whether the funder suffered any actual harm from the change. Courts generally require some showing of prejudice before treating a technical breach as sufficient for full acceleration and enforcement.
4. Stacking — Taking Additional Advances Without Disclosure
Some MCA contracts include a covenant against taking additional advances from other funders without consent. When the funder discovers a business carried multiple MCA positions, it sometimes files a breach claim on stacking grounds alone, even if payments were current at the time of discovery. The claim is that the concealment of additional advances constituted a breach of the covenant.
The enforceability of anti-stacking provisions varies. Courts have held that where the clause is ambiguous, the funder bears the burden of showing the business knew the restriction applied and violated it intentionally. An anti-stacking clause buried in defined terms that the funder never discussed at origination provides limited grounds for acceleration.
5. Interference With Receivables
Where the MCA agreement assigns specific receivables to the funder, a breach claim may allege that the business interfered with the funder’s right to those receivables — by directing customers to different payment methods, by closing the payment processor account, or by otherwise preventing the funder from collecting what the assignment entitled it to receive.
The defense turns on whether the assignment was valid and whether it covered the specific receivables at issue. Broad assignments of all future receivables are scrutinized more carefully in litigation, particularly in bankruptcy proceedings where the trustee may challenge the assignment as a disguised security interest rather than a true sale. The question of whether an MCA is a disguised loan reaches its sharpest form in this context.
6. Personal Guarantee Enforcement
When the funder sues on the personal guarantee after a business default, it is asserting what is technically a separate breach claim: that the individual guarantor failed to satisfy the business’s obligation after being called upon to do so. This claim can proceed even if the underlying contract claim is disputed or still pending.
The guarantee claim has its own set of defenses. Absolute and unconditional guarantees purport to waive all defenses, but courts have found that fraud in the inducement of the guarantee itself, lack of consideration, or material modification of the underlying agreement without the guarantor’s consent can each provide grounds to challenge enforcement. The absolute waiver language is not always as absolute as it reads.
Defending Against Any of These Claims
Every MCA breach defense begins with the contract and ends with the facts. The recharacterization argument — that the agreement is a loan and not a purchase — is available in varying degrees in most cases, but it is not automatic and it is not simple to establish. The procedural defenses (improper service, statute of limitations, lack of standing if the agreement was assigned) require attention to the case record and should not be overlooked while counsel focuses on the substantive arguments.
The time to raise defenses is before judgment is entered, not after. An unanswered MCA breach complaint results in a default judgment that carries the same enforcement weight as a verdict after trial. A first call to counsel changes that trajectory. The settlement process is far more favorable when defenses are on the table.
