Default Is the Beginning of a Legal Dispute, Not the End of One
The MCA contract describes a default, and it specifies remedies. What the contract does not describe are the defenses available to the business owner when enforcement begins. Those defenses exist in statute, in common law, and in the growing body of case law that has examined MCA agreements with increasing skepticism. The business owner who assumes the contract controls everything has not yet spoken with counsel.
Usury and Recharacterization
The foundational defense to MCA enforcement is that the agreement is not what it claims to be. True sales of future receivables are not loans and are not subject to usury laws. But courts have repeatedly found that agreements with fixed effective rates, no genuine revenue-based adjustment, and recourse provisions that ensure repayment regardless of business performance are loans in disguise. A loan whose effective annual rate exceeds the applicable state criminal usury threshold may be void.
In Williams Land Clearing, Grading, and Timber Logger v. Apex Funding Source from North Carolina’s bankruptcy court in 2025, an MCA agreement was found to be a usurious loan. The security interest flowing from that agreement was correspondingly unenforceable. When the core obligation fails, the enforcement mechanism fails with it.
The funder’s security interest is only as valid as the underlying transaction. If that transaction is void for usury, no amount of UCC filings creates enforceable rights.
Defective UCC Filings
A security interest is only perfected if the UCC-1 financing statement is properly filed, names the correct debtor, and accurately describes the collateral. Errors in the debtor’s legal name, jurisdiction of filing, or description of collateral can render the lien unperfected. An unperfected security interest gives the funder an unsecured claim, not a secured one. In bankruptcy, an unsecured claim receives pennies on the dollar.
Funders who file blanket UCC-1 statements routinely and occasionally make clerical errors. Those errors matter more than the funder expects.
Fraudulent Inducement and Disclosure Failures
If the funder or its broker misrepresented the effective cost of the advance, failed to disclose the factor rate’s equivalent annual percentage rate, or made material misrepresentations during the origination process, the agreement may be voidable for fraud. This defense is fact-specific and requires evidence of what was represented and what was omitted, but broker communications, emails, and marketing materials sometimes supply that evidence.
Confession of Judgment Challenges
Many MCA agreements include a Confession of Judgment clause allowing the funder to obtain a court judgment without a hearing. Where the judgment was obtained in New York against a non-New York defendant after 2019, when the state reformed its COJ statute, the judgment is subject to challenge. Courts in states where the judgment is being enforced have vacated COJ-based judgments on grounds including improper jurisdiction and the non-resident debtor’s lack of notice.
Prior Security Interest Priority
Where a senior lender holds a purchase-money security interest in specific equipment, the MCA funder’s blanket lien is subordinate to that interest. The funder can only enforce against the business’s equity in the asset after the senior lender is satisfied. In many cases, that equity is insufficient to justify enforcement.
Bankruptcy’s Automatic Stay
Filing a bankruptcy petition halts all collection actions, including asset seizure, the moment the case is initiated. Any act to enforce a lien against estate property in violation of the automatic stay is void. Funders who seize assets after learning of a bankruptcy filing have exposed themselves to damages and sanctions.
Avoidance of Preferential Transfers
A bankruptcy trustee can recover payments made to the funder during the ninety days before filing while the business was insolvent. If the funder received these payments and the trustee avoids them, the funder’s net recovery decreases by that amount. This is not a defense to seizure in the traditional sense, but it significantly affects the funder’s overall recovery and their incentive to pursue aggressive enforcement.
Unconscionability
Courts in several jurisdictions have examined whether MCA agreements are substantively unconscionable based on the disparity in bargaining power, the obscurity of the true cost, and the one-sided enforcement provisions. This defense is difficult to prevail on as a standalone argument, but combined with other challenges, it contributes to a picture of an agreement that no court is eager to enforce in full.
Consultation is where the applicable defenses are identified and assessed against the specific facts of your agreement.
