What is a merchant cash advance under New York law?
A merchant cash advance is not a loan in form. The funder buys a fixed dollar amount of a business's future receivables at a discount and collects by taking a share of daily or weekly deposits. New York courts look at substance, not the label on the paper.
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How does a merchant cash advance actually work?
A funder agrees to pay a business a lump sum today. In exchange, the business sells a larger fixed dollar amount of its future receivables, called the purchased amount. The funder then collects by debiting the business's account, usually every business day or every week, until the purchased amount has been delivered.
Two numbers do most of the work. The purchase price is what the business receives. The purchased amount is what the funder is entitled to collect. The gap between them is the funder's return, and because it is a fixed sum rather than a rate, an MCA agreement typically quotes no interest rate at all. New York now requires providers of sales-based financing to give a recipient standardised disclosures, including an estimated annual percentage rate, under Financial Services Law § 803.
Why is it structured as a purchase instead of a loan?
Because the distinction has legal consequences. New York caps the rate of interest by statute in General Obligations Law § 5-501 and makes lending above a higher rate a crime under Penal Law § 190.40. Those limits do not apply to most loans to corporations above a certain size, but they are not irrelevant either, and a transaction that is genuinely a purchase of receivables is not a loan subject to usury analysis in the first place.
The form is not the end of the inquiry. In LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664 (2d Dep't 2020), the Second Department set out the factors New York courts weigh when deciding whether repayment is absolute or genuinely contingent: whether the agreement contains a reconciliation provision, whether it has a finite term, and whether the funder has recourse if the merchant files for bankruptcy.
What is a reconciliation provision?
It is the clause that makes the arrangement contingent in practice. A reconciliation provision generally says that if the business's actual receipts fall, the remittance will be adjusted to match an agreed percentage of real revenue, usually on the merchant's request and on production of statements.
Whether a given agreement has a meaningful reconciliation right, and whether it was honoured when asked for, is often the central factual question in later litigation.
What is the personal guaranty for?
Most MCA agreements are signed twice: once by the business, and once by an owner personally. The personal guaranty is what allows a funder to pursue an individual's assets, and it is why an owner can end up named as a defendant alongside the company.
The scope varies more than people expect. Some guaranties are limited to specified breaches, such as diverting receipts or shutting the business down, rather than guaranteeing performance of the advance itself.
What happens when a business cannot make the payments?
Typically the debits fail, the funder treats that as a breach, and collection follows. That can mean a breach of contract action, a filing under a confession of judgment signed at the outset, a UCC lien against business assets, or contact with the business's own customers.
If you are already at that stage, the relevant pages are MCA lawsuit defense, confession of judgment, and frozen bank accounts.
Sources
- LG Funding, LLC v United Senior Props. of Olathe, LLC (2020 NY Slip Op 01607) (New York Official Reports)
Every case turns on its own agreement, facts and procedural posture. Nothing on this site is legal advice or a prediction of any outcome.
FAQ
Questions people ask at this stage
Is a merchant cash advance a loan?
It depends on the agreement rather than on what it is called. New York courts weigh whether the agreement has a reconciliation provision, whether it runs for a finite term, and whether the funder has recourse if the business files for bankruptcy. Where repayment is effectively absolute, a court may treat the transaction as a loan.
Why does my agreement not state an interest rate?
Because it is drafted as a purchase rather than a loan. The funder's return is expressed as the difference between the purchase price and the purchased amount, which is a fixed sum rather than a rate. That does not stop the effective cost from being calculated later.
What is stacking?
Taking a second or third advance while an earlier one is still outstanding. Most agreements prohibit it, and funders frequently plead it as a breach. It also compounds the daily debit burden, which is often what causes the payments to fail in the first place.
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If a funder has sued, filed a judgment or frozen an account, the agreement matters less on its own than what is in the court file. Call and we will start there.