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Are MCA loans legal? What courts look at

Merchant cash advances are lawful in general, but courts can treat one as a usurious loan. The three-factor test, key NY cases, and what it means for you.

Updated

By Anonymous MCA industry contributor Research, writing and editorial review · MCA sales background

Updated 2026-10-30

People usually search this question at a bad moment: the daily debits are eating payroll, someone has told them their advance was "basically a loan shark deal," and they want to know whether they can stop paying. The honest answer is that merchant cash advances are a lawful product in general, but a particular agreement can be treated as a loan by a court, and in New York a loan charging criminally usurious interest can be void. Which side of that line your contract falls on depends on its terms and how the funder actually behaved.

This guide explains how New York courts draw that line, what regulators have alleged against specific funders, and what the answer means for someone in trouble today. It is general information, not legal advice.

Why the "loan or not" question matters

Lending is regulated. Interest rate caps, usury laws, and licensing rules generally apply to loans. Most MCA agreements are written as a purchase of a share of a business's future receivables, which the funder argues is not a loan at all.

New York's appellate courts have accepted that framing in principle. In LG Funding, LLC v United Senior Properties of Olathe, LLC (2d Dept 2020), the court said "the rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be." If the deal is a genuine receivables purchase, usury law simply does not reach it.

But a label is not enough. The same opinion said a transaction "must be 'considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.'" The question is whether the funder "is absolutely entitled to repayment under all circumstances." If it is, the deal starts to look like a loan.

The three factors New York courts weigh

LG Funding set out the test that later cases repeat. Courts "usually weigh three factors when determining whether repayment is absolute or contingent":

  1. Whether there is a reconciliation provision in the agreement.
  2. Whether the agreement has a finite term.
  3. Whether there is any recourse should the merchant declare bankruptcy.

Here is what each one looks like in a real contract.

Reconciliation. A true receivables deal lets the payment go down when sales go down. The question is whether that adjustment is a right or a favor. In LG Funding, the funder "may, upon [the merchant's] request, adjust the amount of any payment... at [its] sole discretion." The court treated that discretionary language as pointing toward a loan. Our reconciliation clause guide shows how to find this section in your agreement.

Finite term. If payments really float with revenue, there is no fixed payoff date. A contract that guarantees repayment by a set date, or a fixed daily debit that never changes, looks more like a loan with a maturity.

Bankruptcy recourse. If the funder bought receivables, it should bear the risk that the business fails. In LG Funding, the merchant's bankruptcy or written admission that it could not pay was an event of default, and a filing let the funder go after the personal guarantors. The court said these provisions "suggest that the plaintiff did not assume the risk that United would have less-than-expected or no revenues," and it refused to strike the merchant's usury defenses.

Two cases, two outcomes

The same test can produce opposite results, which is why nobody can answer "is my MCA legal" without reading the contract.

In LG Funding, the discretionary reconciliation and the bankruptcy terms kept the usury defense in the case, and the funder lost its motion for summary judgment.

In Principis Capital, LLC v I Do, Inc. (2d Dept 2022), the agreement "specifically provided for adjustments to the monthly payments" based on changes in monthly sales. Because payments could change, the term was not finite. And "no contractual provision existed establishing that a declaration of bankruptcy would constitute an event of default." The court held the transaction was not a loan and granted the funder summary judgment.

Davis v Richmond Capital Group, LLC (1st Dept 2021) shows how conduct matters too. The merchants there alleged discretionary reconciliation, refusals to permit reconciliation, daily payment amounts that "did not appear to represent a good faith estimate of receivables," and defaults triggered by two or three rejected debits. The First Department held those allegations were enough to plead that the agreements were loans subject to usury law.

The MCA lawsuit tracker collects these and other published decisions in one table.

What happens if a court calls it a loan

New York's criminal usury rules are the main concern. In Adar Bays, LLC v GeneSYS ID, Inc. (2021), New York's highest court answered yes to a certified question asking whether a loan found criminally usurious under Penal Law § 190.40 is void from the start under General Obligations Law § 5-511. That case involved a convertible note, not an MCA, but the Appellate Division has applied the same consequence to MCAs: in Davis, the court wrote that if the agreements are found to be loans, "criminal usury will be a defense to their enforcement, rendering them void."

There is an important limit. In LG Funding, the court said the merchant "may assert criminal usury as an affirmative defense" but "may not assert criminal usury as the basis for a counterclaim," and it dismissed the counterclaim. In that line of cases, usury works mainly as a defense when the funder sues, not as a standalone claim for money back. Other theories, such as the contract and RICO claims sustained against the funder entities in Davis, follow their own rules.

What regulators have alleged

Enforcement actions do not decide your case, but they show the patterns authorities treat as unlawful.

On January 22, 2025, the New York Attorney General announced a settlement with Yellowstone Capital and related companies that included a $1.065 billion judgment. According to the Attorney General, the contracts "fraudulently described each transaction as a purchase of a portion of a small business's future revenues, with flexible payment amounts and open-ended terms," while the companies actually "collected fixed amounts directly from small businesses' bank accounts every day during short repayment periods that often lasted just 60 or 90 days." The office alleged effective interest rates "of up to 820 percent per year."

Under that settlement, the Yellowstone entities agreed to cancel all outstanding merchant balances, which the office put at $534,552,724, stop collection, discontinue pending enforcement actions, vacate unsatisfied judgments, and terminate some liens. The companies and the officers were banned from the industry. For the case history, see our Yellowstone Capital lawsuit page.

What this means if you are struggling today

Knowing your agreement might be a disguised loan is useful. It is not a plan. A few practical points:

  • Stopping payments is not a legal strategy by itself. It usually triggers default, acceleration, and a lawsuit for the full balance. If you signed a confession of judgment, the funder may move even faster.
  • Read your three clauses first. Find the reconciliation section, any stated term or payoff date, and the events of default. Note whether bankruptcy or "inability to pay" is listed.
  • Document the funder's behavior. Keep every reconciliation request, every refusal, and bank statements showing whether the debit ever changed with your sales.
  • Check the governing law clause. These cases apply New York law. Your agreement may choose another state, and that changes the analysis.
  • Use the defense as leverage, through the right people. A credible usury or reconciliation argument can improve settlement terms, but only a licensed attorney can raise it in court. Our comparison of MCA attorneys vs settlement companies covers who handles what, and contract red flags walks through other clauses to check.

If you are already being sued, start with what the funder's breach of contract claim requires and how to verify your response deadline.

Common questions

Are merchant cash advances illegal?

No, not as a category. New York appellate courts have enforced MCA agreements that genuinely shift revenue risk to the funder, as in Principis. The legal problem arises when a particular agreement, judged by its real terms, makes repayment absolute.

Does a high factor rate make my MCA usurious?

Not by itself. Usury applies only to loans, so the first question is whether the deal is a loan under the three-factor test. LG Funding put it bluntly: without a loan, there is no usury "however unconscionable the contract may be."

Can I sue my funder to get my payments back?

Possibly, but not simply on a usury counterclaim under the LG Funding line of cases, which treated criminal usury as a defense only. The Davis merchants pursued contract and RICO claims instead, with mixed results on appeal. An attorney has to evaluate what claims fit your facts and governing law.

Does the Yellowstone settlement cover my advance?

Only advances from the Yellowstone entities covered by that settlement. The Attorney General's lawsuit continued against other companies and individuals named in the announcement. Check the Attorney General's page for current details.

Sources

Quotations come from the sources above. Outcomes in published cases depend on their specific agreements and records and do not predict yours.

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