The Contract Says One Thing. The Law May Say Another.
Every merchant cash advance agreement describes itself as a sale of future receivables. Courts have not accepted that description at face value. In jurisdiction after jurisdiction, when a debtor or trustee challenges the instrument, the analysis turns on substance rather than label, and the label frequently loses.
Understanding whether your MCA qualifies as a loan matters because the consequences are substantial. A recharacterized loan may fall under usury statutes, may be voidable in bankruptcy, and may reduce the funder’s claim to unsecured status, subject to avoidance as a preference or fraudulent transfer. In Williams Land, the court calculated an effective rate of 101.1 percent and voided the agreement. The contract said nothing of the sort.
Test 1: Are Payments Fixed Regardless of Revenue?
The defining feature of a genuine sale of receivables is variability. When business is slow, the daily or weekly remittance drops. When revenue spikes, payments increase proportionally. If your MCA agreement specifies a fixed daily debit that does not change with your actual deposit volume, that fixed structure strongly suggests a loan.
Courts have repeatedly found that fixed payments indicate the funder bears no risk of business performance. Selling receivables that do not yet exist transfers uncertainty to the buyer. Charging a fixed amount regardless of performance retains that certainty for the funder, which is a lender’s position, not a purchaser’s.
Test 2: Does a Real Reconciliation Mechanism Exist?
Most MCA agreements include reconciliation language. The question is whether reconciliation is genuinely accessible or merely theoretical. Courts in several bankruptcy proceedings have found that reconciliation provisions, while present in the contract, were functionally unavailable: requests were ignored, procedures were unclear, and no business owner was ever documented as having obtained an adjustment.
A nominal reconciliation right does not transform a fixed-payment instrument into a true receivables purchase. The mechanism has to work. If your agreement requires written notice, documentation of revenue, and approval from the funder before any adjustment occurs, and the funder routinely denies or ignores those requests, the reconciliation right is illusory.
Test 3: Is There a Defined Repayment Term?
True receivables purchases do not have maturity dates. The funder receives its percentage of sales until the purchased amount is collected, however long that takes. An agreement that specifies a repayment period of six months, twelve months, or any fixed term establishes a loan-like structure regardless of what the document calls the obligation.
When a funder can declare default because a term expired, rather than because a purchased receivable was diverted, the transaction is functioning as a loan with a scheduled maturity. That distinction has been decisive in several bankruptcy court decisions.
Test 4: Does the Funder Have Recourse Beyond the Receivables?
In a genuine sale of receivables, the funder’s remedy for nonpayment is limited to the receivables themselves. If the merchant’s business fails and there are no receivables to collect, that is the funder’s risk to bear. Recourse provisions that allow the funder to sue the business, pursue the guarantor, or levy personal assets transform the transaction into something more than a purchase of receivables.
Risk transfers in a sale. It stays in a loan. The direction of that transfer is the test courts apply when the label is disputed.
The presence of a personal guarantee is particularly telling. A seller of receivables does not typically require the seller to personally guarantee the value of what was sold. A lender almost always requires a guarantee because the guarantee is the instrument of recourse when the collateral is insufficient.
Test 5: Does the Agreement Survive Bankruptcy?
A true sale of receivables transfers ownership of those assets to the purchaser. If the merchant files bankruptcy, the receivables that were sold are no longer property of the estate; they belong to the funder. A well-structured sale means the funder does not need relief from the automatic stay to collect what it already owns.
Loan agreements behave differently. The funder’s claim becomes a liability in the bankruptcy estate. Collection is stayed. The funder must file a proof of claim and participate in the distribution process. When MCA funders find themselves filing proofs of claim and seeking stay relief rather than asserting ownership rights, they are behaving like creditors, not purchasers, and courts have noticed.
Test 6: What Is the Effective Interest Rate?
This calculation does not appear in the contract. It requires dividing the total repayment amount by the amount advanced, then annualizing the result based on the actual repayment term. The outcomes are frequently startling. Rates above 50, 80, or 100 percent per annum are not unusual in the MCA space, particularly on short-term advances with high factor rates.
New York’s criminal usury statute caps interest at 25 percent per annum for business loans. If a court recharacterizes the MCA as a loan and the effective rate exceeds that threshold, the agreement may be void ab initio. California, New Jersey, and a number of other states have usury-adjacent consumer protection statutes that create similar exposure. The rate calculation is not itself the test, but it is evidence that the transaction was structured to avoid the consequences of being called a loan.
Test 7: How Did the Funder Behave After Default?
Post-default conduct is underweighted in most commercial analyses but carries weight in litigation. A funder who accelerates the total balance, files suit to recover the full amount, invokes the personal guarantee, and pursues collection through wage garnishment or bank levies is behaving like a creditor enforcing a loan, not a buyer seeking to collect purchased receivables.
Courts have used post-default conduct as confirmation of what the transaction always was. If the contract says one thing but the funder acts like a lender when things go wrong, the judicial instinct is to match legal consequence to actual behavior.
The seven tests above are not a checklist where scoring six out of seven determines the outcome. They are factors courts weigh in combination, and different jurisdictions weight them differently. What they provide, collectively, is a clear picture of which side of the loan-vs-sale line your agreement actually sits on.
Consultation is where this conversation begins. The analysis of your specific agreement, in light of your jurisdiction’s most recent decisions, is the predicate for every strategic decision that follows.
