MCA Contracts and State Usury Limits: 5 Questions After Loan Classification

Calling the advance a loan begins the legal inquiry. It does not complete it. An owner who suspects usury needs counsel to identify the governing statute, test whether the transaction qualifies as a loan under that statute, and determine what remedy follows if the test is met. The factor rate alone answers none of those questions. A percentage without a statute is arithmetic in search of authority.

Establish Whether the Transaction Is a Loan

In LG Funding v. United Senior Properties, a New York appellate court examined reconciliation rights, a finite term, and recourse in bankruptcy when deciding whether repayment was absolute. Those features tested whether the funder carried genuine risk or required payment in every circumstance. The opinion rewards reading in full, and counsel should read it before borrowing its language.

The contract was, if we are being precise, less a purchase of future receipts than a schedule of withdrawals wearing a purchase label. Labels do not decide the question in either direction. An owner calling the advance a loan proves as little as a funder calling it a purchase. Performance decides, in most of the files we have reviewed, though the count is not scientific: reconciliation requests made and answered, amendments after slow months, and the response when receipts declined.

And the label on the first page settles nothing.

Simply locating frequent debits leaves the inquiry incomplete. Ask counsel to review and analyze the reconciliation record, the amendments, and the payment history together. We ensure the assessment names its jurisdiction, since a New York opinion cannot substitute for the law of the state whose statute the owner invokes.

Which Law Governs the Claimed Defense

A usury defense needs a statute the way a filing needs a courthouse. Counsel should identify the provision, explain why it reaches this transaction, and test borrower type, amount thresholds, and lender exemptions before any rate is computed. Resist the urge to apply a familiar percentage found online. A number that controls one category of credit may have no bearing on commercial sales of receivables.

The governing law provision in the MCA agreement deserves the same attention (funders select forums and governing law in order to place disputes on familiar ground, and the selection clause, which owners often sign without discussion, can determine which statute is even available to argue).

A reconciliation clause that the funder never honors functions like a rain gauge nailed to the wall of a boiler room: technically present, operationally meaningless, and consulted only after the damage is recorded elsewhere.

This is where most usury arguments fail. Counsel computes a rate before establishing the right to compute one, and the resulting percentage impresses everyone except the court. Whether the court intended that outcome or let it stand without comment is a question worth considering.

Charges and Timing Under That Rule

Once the framework is set, counsel can decide which charges count and over what period. Face amount, net disbursement, retained fees, and collection timing must be reconciled from documents, not from the sales quote. A factor rate is not an annual rate. Both describe cost. Only one decides liability.

There is a peculiar authority in a percentage carried to three decimal places. Arithmetic precision cannot repair a mistaken premise about the law. The contract permitted this.

Retain the origination statement, the payment ledger, and the payoff demand as separate records. Each measures a different stage of the obligation. Where an amount remains disputed, preserve the dispute instead of absorbing it into the math. Counsel should know which figure is used and why before the position is presented to the funder or the court.

Keep the source document behind every number.

The Defense and the Remedy Are Different Questions

A defense limits or defeats enforcement. An affirmative claim seeks relief on its own basis. Counsel should identify which route is available and what procedure each requires. A favorable passage about characterization should not be detached from an opinion that rejected the accompanying counterclaim. The remedy question is less settled than the preceding paragraphs might suggest.

Most owners hear the distinction once and forget it by the next creditor call. That is understandable. The distinction still governs.

Using the Assessment in Negotiation

A supported classification argument can inform negotiation without promising concession. The funder may dispute the governing law, the calculation, or the remedy, and each dispute costs time and money to litigate. Compare any settlement offer against operating cash as it stands, not as the dispute might leave it. Whether this holds outside the Second Circuit is a question counsel elsewhere must answer.

Delancey Street offers a free confidential initial review of MCA debt concerns. Its settlement services provide a forum for negotiation while independently licensed counsel addresses classification and usury questions. The company is not a law firm; confirm eligibility and availability. A useful companion to that review is the appellate opinion testing whether MCA repayment was absolute, which counsel can measure against the actual agreement.

Protect and preserve the legal record beside the accepted terms. A business gains little from a dramatic conclusion built on the wrong statute. It gains a usable decision when the governing rule and the supporting facts stand in the same room.