Illinois Businesses and the Usury Question in an MCA Case
Illinois businesses sued on a merchant cash advance often ask about the rate first. Under the New York law these agreements choose, two things come before that: whether the transaction is a loan at all, and whether the defendant is an entity New York permits to raise usury in the first place.
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The question everyone asks second is the one that decides the first
An Illinois business owner looking at a merchant cash advance for the first time in anger almost always arrives at the same place: this is an enormous effective rate, surely that is illegal. It is a reasonable instinct and it is the third question, not the first.
Two things sit in front of it, and both come from New York law, because New York law is what the agreement chose.
Why there is no rate in the document
Open the agreement and look for a percentage. There usually is not one, and that is not an oversight.
A merchant cash advance is drafted as a purchase. The funder pays a purchase price — the money the business receives — in exchange for a purchased amount of future receivables, which is what the funder is entitled to collect. Collection happens by taking an agreed share of daily or weekly deposits until the purchased amount is delivered.
The difference between those two figures is a fixed sum of money. It is not expressed as a rate because, in the form of the document, nothing is being lent and nothing is being charged. Converting it to an annualised percentage is something an analyst does afterwards, not something the contract does.
Which means a usury argument cannot start with the rate. It has to start by establishing that the transaction is, in substance, a loan — and that is contested in every single one of these cases.
And then there is the question of who may raise it at all
Assume for a moment the characterisation argument succeeds. New York then has a second obstacle, and it is a flat one.
GOL § 5-521 provides that no corporation shall interpose the defense of usury in any action. The section defines the term broadly for its own purposes, to include all associations and joint-stock companies having any of the powers and privileges of corporations not possessed by individuals or partnerships.
That is a one-sentence rule with a large consequence: the corporate defendant in an MCA case is, under the governing law, not a party that gets to run the usury defense. Whether and how that reaches other entity forms is a question about the statute and the case law interpreting it, and this page does not answer it — the text says corporations and associations, and the rest is argument.
Which is why New York law being chosen is not a side issue
GOL § 5-1401 lets parties choose New York law for a transaction covering at least $250,000, whether or not it bears any other relation to the state. Below that figure the choice is not statutory, but it is still in the contract and still argued.
The practical point for an Illinois defendant is that the body of law applied to the deal is substantially a drafting decision made by the funder. Arguing about which law governs is therefore not a technicality; it is upstream of every substantive defense, including this one.
What tends to be worth more
Characterisation arguments are slow, contested and expensive. The arithmetic is usually faster and harder to answer.
The agreement specifies a remittance — a percentage of receipts, or a fixed daily figure meant to approximate one. The bank statements record what was actually taken. The funder's demand records what it says is still owed. Those three should reconcile. When they do not, the discrepancy is a documented fact rather than a legal theory, and it does not depend on persuading anyone that a purchase was really a loan.
The deadline, which is indifferent to all of it
CPLR § 320 requires an appearance within twenty days of service of the summons — answer, notice of appearance, or a motion extending the time to answer — with longer periods in defined circumstances including particular methods of service.
Every argument above is made from inside the case. None of them is available to a defendant who did not appear.
What to do first, from Illinois
- Find the two numbers. Purchase price and purchased amount. Write them down with the remittance terms.
- Pull the full debit history from the day the advance funded to the day payments stopped.
- Check the entity form of each defendant. It bears directly on which defenses are available under the governing law.
- Appear first, argue second. The defenses survive; the deadline does not.
What a merchant cash advance is covers the structure in more depth, and how an MCA lawsuit is defended covers the case once it is answered.
Sources
- N.Y. General Obligations Law § 5-521, Corporations prohibited from interposing defense of usury (New York State Senate)
- N.Y. General Obligations Law § 5-1401, Choice of law (New York State Senate)
- N.Y. CPLR § 320, Defendant's appearance (New York State Senate)
Every case turns on its own agreement, facts and procedural posture. Nothing on this site is legal advice or a prediction of any outcome.
How it works
How your case moves
This is the shape of a defended merchant cash advance lawsuit. A judgment already entered, or an account already frozen, runs on its own track alongside it.
Every case turns on its own agreement, facts and procedural posture. Nothing on this site is legal advice or a prediction of any outcome.
Our firm
Who handles the case
Migir Ilganayev, Esq. founded Ilganayev Law Firm, PLLC in 2017, the same year he was admitted in New York. He is also admitted in New Jersey and Florida.
- Practising since
- 2017
- Admitted in
- New York, New Jersey and Florida
- Law school
- New York Law School
- Appears in
- State and federal courts
- B.A., Political Science and Philosophy of Law, Brooklyn College, City University of New York, 2012
- J.D., New York Law School, 2015
- Judicial intern to the Hon. Martin M. Solomon, Kings County Supreme Court
- Public Service Certificate for pro bono service
FAQ
Questions people ask at this stage
Why does my agreement show no interest rate?
Because it is not written as a loan. The funder buys a fixed dollar amount of future receivables at a discount, so the document carries a purchase price and a purchased amount rather than a rate. The gap between the two is a sum, not a percentage.
That drafting choice is deliberate, and it is the funder answer to usury. It is also why any usury argument has to start by establishing that the transaction is really a loan, which is contested in every one of these cases.
Can my company raise usury as a defense?
Under New York law, a corporation cannot. The General Obligations Law provides that no corporation shall interpose the defense of usury in any action, and defines the term to include associations and joint-stock companies having powers not possessed by individuals or partnerships.
What about me personally as guarantor?
That is a different question from the company one and it turns on facts about the guaranty and the guarantor. It is worth raising with counsel rather than resolving from a web page, because the answer depends on what was signed and in what capacity.
So is the rate irrelevant?
Not irrelevant, but it is rarely the first move. What the funder actually collected against what the agreement allowed is usually a stronger line of attack, because it is an arithmetic question answered by records rather than a characterisation question answered by argument.
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Pick a time that suits you, then a few short questions about what arrived and when. It takes about two minutes, and the consultation is free.
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