The merchant cash advance sits in a regulatory void that most business owners discover only after they have signed the contract. For an industry that moves billions of dollars through small businesses each year, the absence of a coherent federal framework is not an oversight. It is a feature of how the product was designed.
They Are Not Loans Under Federal Law
A merchant cash advance, in its pure form, involves the purchase of future receivables at a discount. Because the transaction is structured as a sale rather than a loan, federal lending statutes do not apply. The Truth in Lending Act, which compels consumer lenders to disclose annual percentage rates and repayment terms in a standardized format, has no jurisdiction over a commercial purchase of receivables. Neither does the Equal Credit Opportunity Act, at least not in the manner most practitioners assumed until a Florida magistrate judge ruled otherwise in early 2025.
That ruling, which sided with the Consumer Financial Protection Bureau’s position that MCAs qualify as “credit” under the ECOA, has not yet produced a binding appellate precedent. For the moment, the classification remains contested. What one can say with confidence is that the structural gap between how MCAs function and how they are classified has persisted for more than a decade, and it persists because it serves the interests of funders who prefer to operate outside the disclosure regime that governs conventional lending.
New York Proved the Classification Can Collapse
In January 2025, New York Attorney General Letitia James announced a settlement against Yellowstone Capital and its network of affiliated companies that exceeded one billion dollars. The theory of the case was straightforward: Yellowstone’s products were not genuine purchases of future receivables. They were loans, disguised as merchant cash advances, carrying interest rates that reached 820 percent per year against a state civil usury cap of 16 percent.
The settlement required the cancellation of all outstanding debts owed by the affected merchants and imposed direct restitution payments. Over eighteen thousand small businesses across the country were impacted.
What Yellowstone demonstrated is that the MCA classification is not a shield. When the economics of the transaction resemble a loan, courts will treat it as one, and the consequences of that reclassification are severe.
The Second Appellate Division in New York had already signaled this direction in 2024, holding in a separate matter that an MCA agreement constituted a criminally usurious loan. The momentum in New York case law is unmistakable.
State Disclosure Laws Are Filling the Gap
California enacted SB 1235 to require commercial financing disclosures, then strengthened the regime with SB 362, which took effect in stages through 2025 and into 2026. Virginia and Utah adopted their own disclosure requirements. Texas passed HB 700 in 2025, requiring MCA providers to disclose total repayment amounts and estimated annual percentage rates while voiding contract provisions that function as confessions of judgment. Louisiana followed with its own commercial financing disclosure statute that same year.
The pattern is clear enough. States are constructing, piece by piece, the regulatory architecture that Congress has declined to build. But the result is a patchwork. A funder operating in twelve states faces twelve different compliance obligations, some overlapping, some contradictory, some enforced with vigor and others gathering dust on the books.
For the business owner in a state that has not enacted MCA disclosure requirements, the practical effect is silence. No mandated APR disclosure. No standardized comparison of cost. No required cooling-off period. The contract itself is the only source of terms, and one must read it with the precision of opposing counsel to understand what it contains.
Federal Enforcement Has Been Narrow
The FTC has pursued individual MCA companies under its general authority to prohibit unfair and deceptive practices. In 2022, RAM Capital Funding and its principal were permanently banned from the industry and ordered to pay restitution after the Commission established that the company had misrepresented contract terms, withheld fees from disbursed funds, and used confessions of judgment to seize personal assets. Richmond Capital received the same treatment months later.
In late 2023, another MCA operator received a permanent industry ban for deceiving small businesses and seizing their assets through unauthorized account withdrawals.
These actions matter. But they are enforcement actions against bad actors, not regulatory frameworks governing the industry. The distinction is the difference between prosecuting a burglar and installing a lock. The FTC can punish misconduct after the fact. It cannot require MCA companies to disclose their pricing in a way that allows a business owner to comparison shop before signing.
And the CFPB, which attempted to bring MCAs within its data collection authority through Section 1071 rulemaking, reversed course in late 2025 by proposing to exclude merchant cash advances from the small business lending rule entirely. The federal appetite for MCA regulation, such as it was, appears to have diminished.
The Practical Consequence for Business Owners
What does the regulatory vacuum mean for the owner of a restaurant or a medical practice or a trucking company who needs capital within the week? It means that the protections available depend on geography, on the specific structure of the MCA agreement, and on whether the funder’s conduct crosses lines that existing laws were not designed to address.
One can sign an MCA in a state with robust disclosure requirements and receive a document that spells out the total cost of capital in terms that permit informed comparison. Or one can sign in a state that treats MCAs as unregulated commercial transactions, where the funder’s only obligation is to honor the four corners of a contract it drafted.
I have watched business owners review MCA agreements for the first time in our office and realize, sometimes with visible discomfort, that the effective annual cost of the capital they accepted exceeds what they would have believed possible for a legal financial product. The absence of regulation does not make these products illegal. It makes them opaque. And opacity is where the damage compounds.
A consultation is where the specifics of your situation become visible. A first call costs nothing and assumes nothing.
