Most business owners who sign a merchant cash advance do not realize they have signed anything resembling a loan. The document calls itself a purchase agreement. The funder calls the daily withdrawal a remittance. The language is deliberate, and it serves one purpose: to place the transaction beyond the reach of usury statutes, beyond the jurisdiction of lending regulations, and beyond the protections that centuries of commercial law have constructed around borrowers. But courts across the country have begun to dismantle that fiction, and the relief available to merchants in 2026 bears little resemblance to what existed even three years ago.
If your business is trapped beneath the weight of one or more MCAs, you have options that the funder would prefer you never discover.
The Reconciliation Defense
Every merchant cash advance agreement contains, or should contain, a reconciliation provision. This clause permits the merchant to request an adjustment of the daily payment amount when revenue declines. In theory, reconciliation distinguishes the MCA from a loan: because the funder shares in the risk of reduced revenue, the transaction is a purchase of future receivables rather than a fixed obligation.
In practice, most funders ignore reconciliation requests. They continue the same daily withdrawal regardless of what the merchant’s revenue looks like. Some agreements contain reconciliation language so narrow it could never be exercised. Others bury it in clauses that require documentation the merchant cannot produce within the stated timeframe.
This matters because courts have held, with increasing consistency, that an illusory reconciliation provision transforms the agreement into a loan. In People v. Richmond Capital Group LLC, the court found that the agreements at issue were usurious loans, in part because the reconciliation mechanism existed on paper but not in operation. When an MCA is recharacterized as a loan, the full weight of state usury law applies. In New York, criminal usury carries a ceiling of 25 percent. The effective annual rates on many MCAs exceed several hundred percent.
The first form of relief, then, is contractual: demand reconciliation. Document the request. Document the refusal. That paper trail becomes the foundation of a legal challenge.
Negotiated Settlement
Funders settle. They settle more often than their collection posture would suggest, and they settle for less than most merchants expect. The reason is structural. MCA funders operate on volume. They fund hundreds or thousands of advances, and the cost of litigating any single default often exceeds what they would recover. A settlement at fifty or sixty cents on the dollar, received within weeks, is worth more to the funder’s portfolio than a judgment that takes months to collect and may prove uncollectible.
The strongest settlements occur when the merchant has retained counsel before the funder files suit. Once a confession of judgment has been entered, the leverage shifts. But even after a judgment, settlement remains possible, because the funder still faces the cost and uncertainty of enforcement.
I have watched merchants accept the first settlement figure a funder offers because the pressure of frozen accounts and daily withdrawals makes any number sound reasonable. That is a mistake. The first offer is a floor, not a ceiling. A second conversation, conducted through counsel, almost always produces a better figure.
Vacating the Confession of Judgment
The confession of judgment is the most aggressive weapon in the MCA funder’s collection arsenal. It is a document the merchant signs at the inception of the relationship, before any default has occurred, authorizing a court to enter judgment without notice or hearing. The funder files the confession, attaches an affidavit of default, and obtains a judgment that freezes the merchant’s bank accounts, sometimes within days.
After New York’s 2019 reform of CPLR Section 3218, confessions of judgment may no longer be filed against out of state defendants in New York courts. If your business operates outside New York and a confession was filed after August 2019, the judgment is likely voidable.
Even for in state merchants, grounds for vacatur exist. Procedural defects in the affidavit, errors in the notarization, deficiencies in the county designation. These documents are generated from templates. Errors occur with regularity, and each error constitutes a basis for relief under CPLR Section 5015.
The court will not be used as a cudgel to enforce potentially illegal and unconscionable loans.
That language appeared in MCA Servicing Co. v. Nic’s Painting, LLC in 2024. It signals something larger than a single ruling. It reflects a judicial temperament that has shifted against MCA funders in ways that make the confession of judgment less reliable than it once was.
Bankruptcy Protection and the Automatic Stay
For businesses drowning under multiple MCAs, Chapter 11 provides a mechanism that no negotiation can replicate: the automatic stay. The moment a bankruptcy petition is filed, all collection activity ceases. Daily withdrawals stop. Lawsuits are halted. Bank account freezes are lifted. The funder must participate in the bankruptcy process on terms the court sets, not on terms the funder dictates.
The question that has dominated MCA litigation in bankruptcy court is whether the advance constitutes a loan or a purchase of future receivables. If it is a loan, the claim is unsecured and subject to discharge or restructuring. If it is a true purchase of receivables, the funder may argue it holds a property interest that survives the stay.
Recent decisions have favored merchants. In In re IVF Orlando, Inc., the court made clear that MCA funders do not automatically own a company’s future receivables, and their claims are often unsecured. Subchapter V of Chapter 11, designed for small business debtors, has become a particularly effective vehicle for restructuring MCA obligations because it is faster, less expensive, and does not require creditor approval of the reorganization plan.
Bankruptcy is not costless. It carries reputational consequences and imposes obligations of disclosure that some business owners find uncomfortable. But for a business that cannot service its MCA debt and continue to operate, it remains the most powerful form of relief available under federal law.
Recharacterization as a Usurious Loan
This is the legal theory that has reshaped the entire MCA industry. When a court determines that an MCA agreement is, in substance, a loan, the consequences are severe for the funder and favorable for the merchant. In states with criminal usury statutes, the agreement may be declared void from inception. Previous payments may be recoverable as fraudulent transfers or preferences. The funder’s claim may be disallowed entirely.
Courts apply a three factor test. Does the agreement contain a genuine reconciliation provision? Does it impose a finite repayment term? Does the funder retain recourse if the merchant becomes insolvent? Where reconciliation is absent or illusory, where the term is fixed, and where recourse survives bankruptcy, the transaction is a loan, regardless of what the document calls itself.
In January 2025, Attorney General Letitia James announced a settlement against Yellowstone Capital and its network of affiliated entities that cancelled outstanding merchant obligations on a massive scale. The settlement represented the largest consumer enforcement action obtained by the New York Attorney General’s office outside a multistate proceeding. Before Yellowstone, the Attorney General had already secured a judgment against Richmond Capital Group and its affiliates in early 2024.
The enforcement trend is clear. The question for any merchant holding an MCA is whether the specific agreement contains the structural defects that courts have identified as indicia of a disguised loan.
State Regulatory Relief
California now requires MCA funders to provide full cost disclosure and to obtain licenses from the state. Enforcement actions have followed. Illinois enacted SB314, which forces plain language contracts and penalizes unlicensed activity. Delaware’s Division of Banking has begun registering MCA firms and initiated enforcement proceedings against those operating without registration.
These regulatory developments create a second avenue of relief for merchants. A funder operating without the required license or disclosure may find its agreements unenforceable. A merchant who received an advance from an unlicensed funder in California, for instance, may have grounds to challenge the enforceability of the entire contract.
The patchwork of state regulation also creates complexity for funders who operate across state lines. That complexity is, for the merchant, an advantage. Each state’s requirements must be satisfied independently, and a failure in any one jurisdiction can compromise the funder’s legal position.
Consolidation and Refinancing
For merchants who are not yet in default but feel the weight of their MCA obligations accelerating, consolidation remains a viable path. The concept is straightforward: replace multiple high cost advances with a single obligation carrying a lower effective rate. An SBA loan, a business line of credit, or even invoice factoring may achieve this, though each carries its own qualification requirements and limitations.
The difficulty with consolidation is timing. Merchants who wait until they have defaulted on one or more MCAs will find fewer options available. UCC liens filed by existing funders complicate new financing. Credit scores, both personal and business, may have deteriorated. The window for consolidation is narrow, and it closes faster than most business owners anticipate.
One approach that has gained traction is the use of a structured settlement combined with new financing. The attorney negotiates reduced payoffs with existing funders while simultaneously arranging a consolidation loan that covers the settled amounts. The merchant emerges with a single payment obligation at a fraction of the original cost. The execution requires coordination and legal oversight, but the outcome can be transformative for a business that would otherwise spiral into default.
The MCA industry was constructed on the premise that its products are not loans and therefore not subject to the protections that apply to lending. That premise is eroding. Courts have recharacterized agreements, attorneys general have pursued enforcement, and state legislatures have imposed disclosure and licensing requirements that did not exist five years ago. The merchant who signed an MCA in desperation is no longer without recourse.
But relief requires action, and it requires counsel who understands the specific vulnerabilities of the MCA structure. The funder’s legal position is not as strong as the funder’s collection department would have you believe. A first consultation costs nothing and assumes nothing. It is where the conversation begins.
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