Is a Merchant Cash Advance a Loan? How New York Courts Decide, and What Costs and Risks Follow

The label atop the agreement settles nothing about its legal character. New York courts read past purchase language to the allocation of risk, and the same file can support a purchase finding on one record and a triable usury defense on another.

Rarely does a file declare its character, so counsel begins with the signed terms and the payment history rather than the marketing description. That reading fixes the price of the money.

1. The Purchase Description and the Substance Test

Merchant agreements describe a sale of future revenue for a purchased amount collected through debits. The opinions treat that description as the start of the inquiry, not its answer, since a transaction must be considered in its totality and judged by its real character rather than the name the parties gave it, like a label on a drawer that says nothing about its contents.

The Second Department framed the question as whether the funder was absolutely entitled to repayment under all circumstances, weighed through reconciliation, finite duration, and whether any recourse survives bankruptcy. The Second Department opinion on MCA repayment character preserved the usury defense and left the funder’s claims for trial, a narrower result than either side advertises.

A purchase structure can be lawful. It can also leave the operating account unable to meet payroll.

2. Reconciliation, Duration, and Bankruptcy Recourse

More disputes turn on the reconciliation clause than on any other paragraph. Where the LG Funding agreement permitted adjustment only on request and at the funder’s sole discretion, the court read that reservation as evidence of absolute repayment, while the Bridge majority found a purchase where two provisions required adjustment of past and future remittances on request with proof of revenue.

In July 2025, the Fourth Department held the agreement a revenue purchase as a matter of law on its record, then reversed the money judgment because the manager’s affidavit conflicted with the verified complaint. The Fourth Department revenue purchase decision leaves the classification victory intact and the collection empty.

When revenue declines and the owner invokes the clause, the request for proof, the continued debit during review, the discretion reserved to the funder, and the absence of a stated deadline combine into the question the opinions examine: whether adjustment existed in fact rather than in print. Correspondence and bank records answer that question, not the heading above the clause.

Funders that reserve sole discretion over relief have reserved everything and promised nothing; I have yet to see such a clause favor the merchant. Guaranties strengthen that reading, since enforcement against the owner in an individual capacity suggests recourse the purchase label denies (a concurrence treated the guaranty as separate from the merchant contract, which the majority did not adopt, and most files within my experience bear that out, though the sample is not scientific).

The agreement was, if precision matters, a purchase of future revenue on the papers the Bridge majority credited. Other papers invite and support the opposite finding.

The advance buys tomorrow at a discount and collects through the daily debit. The loan rents money by the month. The file tells counsel which sentence describes the pages the owner signed.

3. Duration, Recourse, and Cost Without a Rate

Duration and bankruptcy recourse complete the triad. The Bridge papers showed no interest rate, no payment schedule, and no recourse where the business slowed or failed. The LG papers made admitted inability to pay and bankruptcy a trigger for immediate repayment.

No interest rate appears in the MCA file. The LG figures imply a markup above one quarter of the funds advanced, yet no annual rate follows without a repayment period the agreement does not supply, and neither opinion performs that translation. The opinion records a purchase price of $100,990 against a purchased amount of $129,267.20, a ratio drawn from the signed pages without any industry label.

Sales based repayment alone answers the classification question in neither direction. PayPal calls its Working Capital product a sales based business loan with a fixed fee, collected from PayPal sales with minimum repayment every 90 days, where percentage collection and loan status coexist by design.

What rate the owner paid is a question the file answers only after the last debit clears. The arithmetic takes a minute.

4. Collection Conduct and Disclosure Duties

Two providers left the industry under an extremely public January 2022 settlement of charges that they seized assets of small businesses through deception in order to collect. The federal order banning the providers from MCA and collection activity bound its subjects while the case against the remaining defendants continued, so it proves a remedy against its subjects rather than a verdict on the industry.

California requires MCA providers to furnish cost disclosures, and its 2023 rules prohibit unfair, deceptive, or abusive commercial financing practices. The California advisory inviting MCA complaints from small businesses asks owners to report, though a complaint by itself cancels no debt and suspends no lawsuit. Confession terms, where present, need separate reading under the law of the forum.

The owner meets these distinctions in a demand letter or a bank notice rather than in the agreement, by which point the file is organized around someone else’s extremely confident reading of it, though counsel may reach a different reading on the full record.

5. Records That Support Either Answer

Before any offer is signed, before counsel has measured the remaining balance, the debits continue. Simply assemble the signed agreement with attachments, the bank statements, any reconciliation request with its response, and the marked guaranty pages.

No statement about the debt should reach the funder without counsel present, even briefly, and no payment should leave the account on bare verbal assurance. Resist the urge to discard processor statements once the balance looks wrong.

Delancey Street reviews and analyzes files of this kind and proposes settlements where the records support one, operating as a debt relief company rather than a law firm and coordinating with independently licensed counsel where legal questions control. A first conversation is a free confidential file review.

Whether purchase or loan, the discipline is constant: read the risk as reserved, price the money as the debits prove it, and ensure no response is signed without counsel present. The objective is to ensure the next signature reflects deliberation rather than pressure.