7 Reasons Courts Are Starting to Treat MCAs as Loans

The merchant cash advance was never supposed to be a loan. That was the entire premise, the structural conceit upon which an industry worth tens of billions of dollars constructed itself. A purchase of future receivables, the contracts insisted, not a lending arrangement subject to usury caps or licensing requirements. For years, courts accepted this framing without much interrogation. That era of deference is closing.

What changed was not the law itself but the conduct of the funders. When an MCA company refuses to reconcile payments with actual revenue, when it debits a fixed amount regardless of sales, when it pursues personal guarantors for the full balance after a business fails, the transaction begins to resemble something courts have regulated for centuries. The label on the contract matters less than the economic reality beneath it.

The Reconciliation Test

Every legitimate merchant cash advance contains a reconciliation clause. In theory, this provision permits the merchant to request that daily or weekly payments be adjusted to reflect actual receivables. In practice, many funders treat reconciliation as decorative language. They bury the mechanism in dense contractual provisions. They impose documentation requirements so burdensome that no small business owner could satisfy them while also running a business.

Courts have noticed. In Fleetwood Services, LLC v. RAM Capital Funding, LLC, the Southern District of New York examined whether the reconciliation clause was functional or merely cosmetic. The court held that a reconciliation provision with no accessible process amounted to a fixed repayment obligation. A fixed repayment obligation is a loan.

This reasoning has since spread. Where the funder cannot demonstrate that reconciliation was available, meaningful, and actually offered to the merchant, judges are increasingly willing to look past the contract label.

Fixed Payments and the Absence of Risk

The defining characteristic of a true receivables purchase is contingency. The buyer assumes some risk that receivables will not materialize. If the business collapses and generates no revenue, the purchaser absorbs that loss. That is the bargain.

But many MCA agreements guarantee the funder’s return through mechanisms that eliminate risk entirely. Fixed daily ACH debits that do not fluctuate with sales. Personal guarantees that survive the death of the business. Confessions of judgment filed the moment a payment is missed. These features, taken together, transform a contingent arrangement into an absolute obligation to repay.

A 2024 ruling from the Second Appellate Division in New York, Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, found that the defendants had established the agreement was a criminally usurious loan. The interest rate equivalent, the court observed, exceeded what New York’s civil usury cap permits by a factor of fifty.

The word “criminally” carries weight in that sentence. It signals that the judiciary is no longer content to treat MCA disputes as mere contractual disagreements.

New York’s Billion Dollar Message

In early 2025, the New York Attorney General announced a settlement with Yellowstone Capital and its network of affiliated companies. The judgment exceeded one billion dollars. The AG’s office alleged that Yellowstone had disguised high interest loans as merchant cash advances, with effective rates reaching as high as 820 percent annually, against a civil usury cap of 16 percent.

The settlement banned the companies and their officers from the MCA industry. It cancelled all outstanding debts owed by affected merchants, over eighteen thousand businesses across the country.

One does not extract a billion dollar judgment from a legitimate receivables purchase arrangement. The size of the figure announced something beyond enforcement. It established, in the most concrete terms available, that state regulators regard the MCA structure as susceptible to the same scrutiny applied to lending.

Bankruptcy Courts and Recharacterization

When a merchant files for Chapter 11 protection, the bankruptcy court must determine the nature of every claim against the estate. MCA funders who file claims face an uncomfortable question: if the advance was a true purchase of receivables, there may be nothing to claim, because the receivables were already sold. If, on the other hand, the funder asserts a right to a fixed dollar amount regardless of receivables, that assertion looks like a debt, and debts in bankruptcy are subject to discharge, cramdown, and recharacterization.

Bankruptcy judges have grown more sophisticated in their analysis of MCA agreements. They examine the actual flow of payments, whether the funder bore genuine risk of loss, and whether the merchant had any realistic ability to pay less than the full purchased amount. The answer, in a growing number of cases, has been no.

And that answer has consequences beyond the bankruptcy proceeding itself. It creates precedent that state court judges cite when evaluating MCA disputes outside of insolvency.

The CFPB Steps In

In February 2025, a federal magistrate judge in Florida sided with the Consumer Financial Protection Bureau’s position that merchant cash advances qualify as “credit” under the Equal Credit Opportunity Act. If that characterization holds on appeal, MCA funders would become subject to federal fair lending requirements, including prohibitions on discrimination and mandated disclosures.

The implications are broad. An industry that structured itself to operate outside the regulatory perimeter of consumer lending may find that perimeter expanding to include it. The ECOA is not a marginal statute. It carries real enforcement authority and real penalties.

Whether that particular ruling survives appellate review remains uncertain. But the direction of regulatory interest is not.

What the Contract Says Versus What the Funder Does

Perhaps the most consequential shift in judicial reasoning involves the gap between contractual language and operational conduct. A contract may describe a contingent purchase of future receivables. The funder’s behavior may tell a different story.

Courts now examine whether the funder conducted any diligence on the merchant’s actual receivables before funding. They ask whether payments were ever adjusted downward during periods of low revenue. They investigate whether the funder treated default as a breach of a purchase agreement or as a failure to repay a debt. In most of the cases where recharacterization has occurred, the funder’s own conduct provided the evidence.

There is an irony here worth sitting with. The MCA industry’s insistence on aggressive collection, on fixed debits, on confessions of judgment, on personal guarantees, these practices were designed to reduce risk and accelerate recovery. They have instead supplied courts with precisely the evidence needed to reclassify the transactions as loans.

Where This Trajectory Leads

Seven distinct pressure points now converge on the MCA industry: nonfunctional reconciliation clauses, fixed payment structures, elimination of funder risk, state attorney general enforcement, bankruptcy recharacterization, federal regulatory expansion, and the growing judicial focus on conduct over contract language.

None of these developments, taken alone, would transform the industry. Taken together, they describe a legal environment in which the merchant cash advance, as traditionally structured, faces genuine existential pressure. Funders who wish to preserve the non loan characterization will need to demonstrate that their products actually function as purchases of receivables, not merely that the contract says so.

For business owners currently bound by MCA agreements that look and feel like loans, these developments represent something more immediate than a trend. They represent potential defenses, potential causes of action, and a potential path to relief that did not exist even a few years ago.

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