Is Your Merchant Cash Advance Actually a Disguised Loan?

Every merchant cash advance agreement says the same thing on page one: this is not a loan. The funder isn't lending you money, the paperwork insists — it's purchasing a slice of your future sales, and it's taking a real risk that those sales might never materialize.

Courts are increasingly unwilling to take that sentence at face value. And whether an MCA is truly a sale of receivables or a loan wearing a disguise isn't just a technical distinction — it determines whether the funder can legally charge what it's charging you.

Why the Contract Insists It Isn't a Loan

Loans are regulated. In New York — the law that governs the vast majority of MCA agreements, regardless of where the business itself is located — commercial loans that charge interest above 25% are criminally usurious, void, and unenforceable. A genuine purchase of future receivables isn't a loan at all, so it isn't subject to that cap, no matter how high the effective return works out to be.

New York courts have been unwinding "pretended sales" used to dodge usury limits since the 1800s. The tools have changed — merchant cash advances instead of "sales of choses in action" — but the underlying question courts ask is the same one they've been asking for two centuries: is this really what it claims to be?

Substance Controls, Not the Label

According to Adar Bays, LLC v. GeneSYS ID, Inc. (2021), when determining whether a transaction is a loan, substance — not form — controls. A contract can call itself a "Receivables Sale Agreement" a dozen times and still be treated as a loan if that's what it actually is in practice.

To make that determination, courts in this area have generally looked at three factors, most recently summarized by the Second Circuit in Fleetwood Services, LLC v. Richmond Capital Group LLC (2023):

• Is there a reconciliation provision? A true sale should let the amount collected adjust up or down with your actual sales. If the "adjustment" is illusory — discretionary, capped, or effectively unavailable — that looks like a fixed loan payment dressed up as a percentage.

• Does the agreement have a fixed term? A set payoff period, calculable in advance, is a hallmark of a loan.

• Does the funder have recourse if the business goes bankrupt? A genuine purchaser of receivables takes the risk that the well runs dry. A lender expects to get paid (or to have recourse against a guarantor) regardless.

Courts are careful to note that these three factors are a guide, not a checklist to be mechanically scored. The real question is the character of the transaction as a whole.

Inside a Real MCA Contract: What One Court Found

In February 2026, a federal bankruptcy court in the Southern District of New York examined exactly this question in In re Greenwich Retail Group LLC — a case involving, among other funders, Itria Ventures LLC, a company that shows up constantly in this space. The court's analysis of Itria's standard agreement is instructive for any business trying to figure out what it actually signed.

A few things stood out to the court:

• "Material Breach" was defined so broadly — including things like the existence of other, undisclosed debt — that the debtors may have technically been in default from the moment the ink dried, regardless of how their receivables actually performed.

• The reconciliation window was capped at a single calendar quarter, with no real refund mechanism — an overpayment could only be applied as a "credit" against future payments, not returned.

• The receivables definition was so broad that it captured virtually every dollar the business took in, meaning the funder faced essentially no real market risk — only the same credit risk any lender takes on.

• The funder collected full recourse against personal guarantors the moment any "Material Breach" occurred, whether or not the business's receivables had actually dropped.

Based on features like these, the court held that the debtors had plausibly alleged the agreement was really a loan subject to New York's criminal usury statute.

Why This Distinction Actually Matters

If a court ultimately agrees that an MCA is really a loan, and the effective rate exceeds New York's 25% criminal usury cap, the consequences are serious — usurious debts are void under New York law. Corporations and LLCs can't raise civil usury as a defense, but they can raise criminal usury, which is enough to challenge what a funder claims you still owe. Getting back what you've already paid is a separate, harder question, usually requiring a different legal theory entirely.

Warning Signs Your Merchant Cash Advance May Actually Be a Loan

• Fixed daily or weekly payments that don't move regardless of how sales are actually doing

• Multiple businesses or entities bundled into one agreement with joint liability

• A "default" or "Material Breach" clause broad enough to be triggered by things unrelated to your receivables

• Reconciliation that's discretionary, time-limited, or pays out only as a "credit" rather than a refund

• A personal guaranty the funder can enforce no matter why the business struggled

• No specific receivables, invoices, or accounts ever actually identified in the contract

If This Sounds Familiar

If your merchant cash advance has some of these features, the label on the contract may not be the last word on what you actually owe.

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Gesund Law Offices, LLC

Phone: 702-300-1180 | Email: keren@glolawfirm.com

This article is provided for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Gesund Law Offices, LLC. Every business's situation is different — contact us to discuss yours.