6 Elements of the “True Loan” Defense in MCA Litigation

If you’re being sued on an MCA, the single most important question your attorney should be asking is whether the agreement is actually a purchase of receivables, or whether it’s a disguised loan. This matters. Because if it’s a loan, and the effective interest rate is above your state’s usury cap, the whole thing can be unenforceable. In New York, criminal usury kicks in at 25%. Most MCAs, when you do the math on the effective rate, are well north of that. Sometimes 100%+, sometimes 300%+.

Short answer: MCA funders structure their agreements to look like purchases of future receivables, not loans, specifically to dodge usury laws. The “true loan” defense says – forget what the paper says, look at the economic reality. Courts in NY, NJ, and a handful of other states have been increasingly willing to do exactly that. If you can prove the transaction was really a loan, you can kill the case, claw back what you’ve paid, and in some cases get the funder hit with criminal usury findings.

Here are the 6 elements courts actually look at.

1. Is repayment absolute or contingent?

This is the big one. A real purchase of receivables means the funder takes on the risk. If your business slows down, they collect less. If your business dies, they collect nothing. That’s the deal. A loan, on the other hand, has to be paid back no matter what.

Most MCA agreements have a “reconciliation” clause that supposedly lets you adjust your daily payment if revenue drops. On paper, this makes it look like a purchase. In practice, a lot of funders make reconciliation nearly impossible – they require 30 days of bank statements, a written request, their approval, and even then they’ll deny it or drag it out for months. If reconciliation is theoretical, the repayment is effectively absolute. And absolute repayment looks a lot like a loan.

2. Is there a fixed term, or does the term float with receivables?

A true purchase has no maturity date. You owe what you owe until the receivables come in, however long that takes. A loan has a term. If the MCA agreement has language that effectively creates a fixed payoff window – daily payment x number of days = the purchased amount – courts will notice. The funder is expecting to be paid in full by a specific date, which is how loans work, not how purchases work.

3. Does the funder have recourse against the merchant personally?

Here’s where a lot of MCA agreements fall apart under scrutiny. If the funder is truly buying your receivables, and your business stops generating revenue through no fault of your own, they eat the loss. That’s the risk they priced in. But most MCAs have a personal guaranty, and the guaranty usually kicks in on “default” – and default is defined so broadly(see my earlier post on this) that any hiccup triggers it. If the funder can always get paid, from the business or from you personally, they never really took on the risk of non-payment. No risk = not a purchase = probably a loan.

4. How is the “purchased amount” calculated?

Real receivables purchases discount the face value based on collection risk and time value. If a funder gives you $100k and you’re obligated to deliver $140k in future receivables, and they just picked that number, that’s a clue. Especially when the same funder does that same 1.4 factor rate on every deal regardless of industry, regardless of your business’s actual receivables quality, regardless of anything. That’s not underwriting a purchase. That’s pricing a loan.

5. What happens if the business goes under?

Read the default section carefully. In most MCAs, bankruptcy is a default. Closing the business is a default. Selling the business is a default. If any of these trigger immediate acceleration of the full balance, the funder is telling you, in their own contract, that they expect to be repaid even if the receivables disappear. Which is the definition of a loan. A true receivables purchaser, whose entire position depends on receivables existing, cannot logically accelerate when the receivables stop existing.

6. The totality of the circumstances.

Courts don’t just check boxes – they look at the whole picture. What did the marketing say(did the funder advertise “fast business loans” on their website, then put “purchase of receivables” in the contract)? What do the internal documents say? What did the broker tell you on the phone? In discovery, a lot of funders have been caught with internal emails, sales scripts, and CRM notes that call the product a “loan.” If you can get to those in litigation, you’ve won half the fight.