The legal idea behind every MCA, the three questions New York courts ask, and what the answer does and does not mean for you.
5 min readUpdated Oct 2026Written for merchants
On paper, an MCA is not a loan. You sold a share of your future sales, and the funder took the risk that those sales would be smaller than hoped. Courts do not stop at the paper. They ask whether the deal works like a purchase or like a loan with another name.
The short answer
It depends on the agreement and on how the funder acts. Some MCAs have been treated as true sales. Others have been treated as loans. There is no yes or no that fits every contract, and a court decides each one on its facts.
Why it matters
Loans are covered by usury laws, which cap the interest a lender can charge. Purchases of receivables generally are not. That is the main reason MCAs are written as purchases, with a "purchased amount" instead of a loan balance and a "factor rate" instead of an interest rate.
In New York, where many MCA contracts say disputes must be heard, the civil usury limit is 16% a year and the criminal usury limit is 25%. A business that is a corporation generally cannot raise the 16% limit as a defense, but it can raise the 25% criminal limit. The statutes also have exceptions, including for very large financings. If a court decides an MCA is really a loan, the question becomes whether its rate crossed a line like that.
The three questions
A New York appellate court has said the key question is whether the funder is "absolutely entitled to repayment under all circumstances." To answer it, courts there have looked at three things:
Is there a real reconciliation provision? If your payments are meant to follow your sales, there should be a way to lower them when sales fall. A clause that exists on paper but lets the funder refuse "in its sole discretion" counts for less.
Does the agreement have a finite term? A deal with no end date, where the funder keeps collecting until it has the full amount however long that takes, looks more like a loan.
Can the funder still collect if the business goes bankrupt? In a true sale, the funder carries that risk. Terms that make bankruptcy an event of default, or let the funder go after the owner for the full amount, point toward a loan.
These are factors, not a checklist. Any one of them can tip a case, and judges weigh them together.
What courts have done
A few New York decisions show how different the outcomes can be.
In a 2020 appellate decision, a funder had bought 15% of a merchant's daily revenue for $100,990 and expected $129,267 back, about 1.28 times what it paid. The reconciliation clause let the funder adjust payments "at its sole discretion," and the court found a triable question about whether the agreement was a usurious loan.
In a 2022 appellate decision, the funder won. The court looked at the reconciliation provision, the finite term and the bankruptcy terms, and found the agreement was a true sale.
In 2023, the federal appeals court that covers New York affirmed that a different agreement was a usurious loan. Its reconciliation right was at the funder's "sole discretion," and the funder could pursue the owners if the business went bankrupt. That was a short summary order that does not bind other courts.
Courts can also look at what the funder actually did, for example whether it ever really adjusted payments when sales fell. Other states have their own laws and tests.
What it means for you
This is a legal argument, not a way to stop paying. A lawyer raises it, usually as a defense in court. Stopping payments yourself because you believe your MCA is a loan can be a default.
The reconciliation clause matters twice. It is your right to a lower payment when sales fall, and it is also evidence of whether the deal is a sale. Use it, in writing, and keep the funder's replies.
Read your own agreement for the three factors. Look for "sole discretion" language near the reconciliation clause, whether the term ends, and what happens on bankruptcy. See Reading your MCA contract.
Keep records. Statements, requests, replies and dates are what a lawyer will ask for first.
What we are not sayingThis guide does not say your MCA is a loan, or that any court will treat it as one. Funders have won many of these cases. It explains the question so you can ask a lawyer the right things.
Why the question gets asked
Take a plain example, with numbers worked out by formula rather than rounded by hand.
Why the question gets asked (illustration only)
Cash the funder pays$100,000
Factor rate1.35
Total delivered back$135,000
Fixed payment, 140 business days$964.29
Rate, if the same cash flows were a loanabout 113% a year
New York civil usury limit16%
New York criminal usury limit25%
This is only to show why the question comes up. A court decides what counts as interest, how fees are treated and which rate applies. See Factor rate vs. APR for how these rates are calculated.
N.Y. General Obligations Law 5-501 and 5-521; N.Y. Penal Law 190.40
Case summaries are general descriptions based on the published decisions and law-firm summaries. Courts reach different results on different facts. Talk to a lawyer about your own agreement.
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