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How Do Merchant Cash Advances Differ From the Sale of Future Receivables?

Merchant Cash Advance v. Sale of Future Receivables plus case law

The key differences between a Merchant Cash Advance (MCA) and the sale of future receivables:

1) Legal Nature:

  • An MCA is not technically a loan, but rather an advance purchase of a business's future credit card sales/receivables at a discounted rate.[1][2]
  • A loan based on future receivables is borrowed money that must be repaid with interest over a set term. [3]

2) Repayment Structure:

  • For an MCA, repayment is made by remitting a percentage of the merchant's daily credit/debit card sales until the advance plus fees are fully paid back. The repayment amount fluctuates based on sales volume.[4]
  • Loans based on future receivables have fixed scheduled payments that must be made regardless of the business's sales performance or cash flow.

3) Conditional vs Unconditional Repayment:

  • MCA repayment is conditional and tied to the merchant's ability to generate future sales/receivables. If sales decline, payments can be adjusted down.
  • Loan repayment is an unconditional obligation, with fixed payments due irrespective of the borrower's revenue stream.

4) Regulations and Requirements:

  • MCAs are not structured as loans, so they may not subject to the same regulations, licensing requirements, or scrutiny as traditional loans.
  • Loans generally have stricter qualification criteria, documentation requirements, and underwriting processes compared to MCAs.

In essence, an MCA provides more flexible repayment terms directly linked to the merchant's sales performance, while a loan based on future receivables has rigid repayment schedules irrespective of cash flow. However, MCAs tend to have higher overall costs compared to traditional loans.

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What is the Typical Repayment Period for A Merchant Cash Advance Compared to a Purchase or Sale of Future Receivables?

The typical repayment period for a Merchant Cash Advance (MCA) is shorter compared to a purchase or sale of future receivables financing arrangement.

For Merchant Cash Advances:

  • The repayment period typically ranges from 3 months to 18 months.[5]
  • Most MCAs have repayment terms between 6-8 months.[6]
  • The repayment duration is directly tied to the merchant's sales volume, with higher sales leading to faster repayment.[7]

For Purchase/Sale of Future Receivables Financing:

  • These arrangements have fixed repayment schedules over a set term, similar to traditional loans.
  • Traditional business loans can have repayment terms ranging from 1 year up to 25 years or more, depending on the loan amount and type.[8]

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Disadvantages of Merchant Cash Advances:

  • Consistent Payment Obligations: Merchant cash advances require regular monthly repayments, which must be met irrespective of business performance.
  • Revenue-Based Repayments: For certain MCAs, the repayment amounts are linked to the business’s revenue levels. This means higher earnings lead to higher repayments, which could impact your cash flow during profitable periods.
  • Budgeting Challenges: The variability in repayment amounts based on sales makes it hard to predict financial outflows, complicating budget management. Higher sales result in higher repayments, which might restrict the ability to allocate funds to other business needs.
  • No Early Repayment Benefits: The terms of MCAs are set at the outset, including the discount applied to the advance, which means there's no financial advantage to early repayment.
  • Potentially Higher Costs: When compared to other financing options such as business lines of credit or venture debt, the fees associated with MCAs can be relatively higher.
  • High Potential APRs: MCAs are known for their accessibility, even to businesses with poor credit or those in risky industries, which contributes to higher annual percentage rates (APRs). These rates can escalate quickly, especially as repayments accelerate with increased sales, impacting the overall cost of the advance.

Why are Merchant Cash Advance APRs so High?

MCAs often carry high APRs due to the lack of regulatory oversight, allowing providers to set high interest rates. The risk associated with lending to ventures that have higher default probabilities also contributes to these elevated rates. Furthermore, the speed of your sales can significantly influence your repayment amount, potentially increasing the APR further.

Merchant Cash Advance v. Traditional Business Loan

Merchant Cash Advance Versus a Traditional Loan:

Financing Type

Merchant Cash Advance (MCA)

Business Loan

Nature of Finance

Advance on future sales revenue

Funding provided as a loan

Approval Criteria

Quicker, less rigorous process

Involves a detailed process, might need collateral

Repayment Structure

Based on a percentage of daily or weekly sales

Consists of set monthly payments

Cost of Finance

Typically a higher flat fee compared to traditional loans

Lower interest rates compared to MCAs

Credit Requirements

More accessible for businesses with poor credit

Generally requires a solid credit score and financial health

Best Suited For

Suited for businesses with variable income or those with seasonal trends

Best for businesses with consistent revenue streams


Rapid funding, straightforward application process, no collateral needed

Fixed repayment terms, more favorable interest rates


Costs more due to higher fees, can disrupt cash flow

Approval may take time, good credit and sometimes collateral required

CFPB Expands Definition of 'Credit' to Include Merchant Cash Advances Under ECOA

On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) published its rule regarding small business data collection and reporting. This rule amends Regulation B under the Equal Credit Opportunity Act (ECOA), as directed by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This new rule mandates that financial institutions originating at least 100 small business credit transactions each year must gather and report various data, including information on loan applications, origination, pricing, and certain demographics of applicants and borrowers.

In a significant development, the CFPB’s commentary within this rule's release has broadly categorized merchant cash advances as "credit" for purposes of ECOA. This interpretation will affect not only the applicability of this specific rule but also the general compliance obligations regarding fair lending and adverse actions for providers of merchant cash advances.

CFPB’s Rationale for Classifying Merchant Cash Advances as 'Credit'

According to the CFPB’s interpretations and the rule, merchant cash advances fall within the scope of "covered credit transactions." The CFPB extends the traditional definition of "credit" under ECOA, which involves the right to defer payment of a debt. Despite the non-recourse nature of these advances, where repayment depends on future sales, the CFPB views that advancing funds with deferred repayment terms constitutes credit.

In distinguishing merchant cash advances from factoring arrangements, which are not considered "credit," the CFPB noted that unlike factoring, merchant cash advances do not involve existing receivables at the time of the transaction. This perspective was solidified despite opposition from industry trade associations, which argued that the nature of merchant cash advances is more akin to factoring due to their immediate exchange of value.

Implications for Merchant Cash Advance Providers 

The classification of merchant cash advances as "credit" means that providers will be subject to the broader compliance requirements of ECOA and Regulation B. These include obligations related to anti-discrimination and the need to take adverse actions. The CFPB's stance may also influence how these financial products are treated under other credit-related regulations, although traditional lender licensing and usury laws might not apply, as they typically pertain only to defined "loans."

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New York Case Law Governing Future Receivables Contracts and Merchant Cash Advances

Enforceability of Merchant Cash Advances

In Tender Loving Care Homes Inc. v. Reliable Fast Cash, LLC, the Supreme Court of Richmond County adjudicated on the nature of a merchant cash advance (MCA) agreement, allegations of usury, and the enforceability of a confession of judgment. Plaintiffs contested that the MCA was a disguised usurious loan and claimed fraud, while the defendant argued the agreement was a legitimate purchase of receivables.

Key Points of Law:

  1. Nature of Agreement: The court examined whether the MCA was a genuine purchase of receivables or a disguised loan. It held that the agreement was validly for purchasing receivables, primarily because repayment was not absolute but contingent on business revenue.

  2. Usury Claims: New York law prohibits usury claims from corporations, and usury requires an actual loan. Since the court determined no loan existed, the plaintiffs could not claim usury.

  3. Unjust Enrichment Claims: Despite the existence of a valid contract, the court did not dismiss the unjust enrichment claim. It found that allegations of unrecorded payments were sufficient to plead this cause at the pleading stage, allowing this claim to proceed to discovery.


The court concluded that the MCA was not a usurious loan but a valid contractual agreement to purchase future receivables. It dismissed claims related to usury and fraud due to insufficient evidence of a disguised loan and actionable fraud. However, it allowed the unjust enrichment claim to proceed, recognizing the potential discrepancies in payment recordings. The main takeaway is that proper contractual framing of financial agreements like MCAs can protect against usury claims, but parties must still ensure transparent transaction recordings to avoid unjust enrichment claims.

Case Citation: Tender Loving Care Homes Inc. v. Reliable Fast Cash, LLC., 172 N.Y.S.3d 335, 335–42 (N.Y. Sup. Ct. 2022)

Evaluating Usury Claims in Commercial Transactions Involving Future Receivables

In LG Funding, LLC v. United Senior Properties of Olathe, LLC, the Appellate Division of the Supreme Court of New York faced the issue of whether a transaction structured as the purchase of future receivables could be considered a criminally usurious loan. The buyer, LG Funding, LLC, initiated a breach of contract lawsuit against the seller, United Senior Properties, which countered by alleging the agreement was a usurious loan. The Supreme Court denied the buyer's motion for dismissal and summary judgment, prompting an appeal.

Key Points of Law:

  1. Usury and Transaction Nature: To determine if a transaction is usurious, the agreement must be analyzed in its entirety to discern its real character, not merely by the labels parties assign to it. The essence of usury requires the existence of a loan with absolute repayment obligations.

  2. Reconciliation Provisions and Risk: The presence of a reconciliation provision in the agreement and the risk assumed by the buyer in potential non-payment scenarios are critical in assessing if the agreement constitutes a loan.

  3. Dismissal Standards: A motion to dismiss based on documentary evidence can only be granted if the evidence conclusively establishes a legal defense that refutes the plaintiff's claims as a matter of law.


The court affirmed the lower court’s decision, modifying it to dismiss the counterclaim of usury but maintaining the denial of the motion for summary judgment on the breach of contract. This decision underscores the legal principle that the true nature of a financial agreement, whether as a loan or a purchase of receivables, depends on the specifics of repayment obligations and the risk undertaken by the financier, rather than the terminology used in the agreement. The case emphasizes the importance of careful contractual drafting and clarity in defining the terms of financial agreements to avoid potential usury claims.

Case Citation: LG Funding, LLC v. United Senior Properties of Olathe, LLC, 122 N.Y.S.3d 309, 309–13 (N.Y. App. Div. 2d Dept. 2020)

Sidenote: What is a "Reconciliation Provision" in the Purchase of Future Receivables

Here's a breakdown of the key components:

  1. Reconciliation Provision: This clause is typically found in agreements involving the sale or advance of future receivables. It allows for adjustments to the payments to be made based on actual sales or revenue figures, as opposed to a fixed repayment schedule typical of loans. The purpose is to align the repayments more closely with the actual cash flow of the business, reducing the burden during slower business periods. The presence and terms of such a provision can imply that the repayment obligation is not absolute but contingent on the business's performance, which is a characteristic not typically associated with loans.

  2. Risk Assumed by the Buyer: This refers to the financial risk the buyer (or financier) takes on in the agreement. In a traditional loan, the lender expects to be repaid the principal plus interest regardless of the borrower’s financial situation. However, in agreements like those for purchasing future receivables, the buyer may assume more risk. For instance, if the repayment depends significantly on the business's ongoing sales or revenue, and these are lower than expected, the amount repayable may be reduced accordingly. This contingent nature of repayment, where the financier assumes part of the business’s performance risk, is more characteristic of an investment or a purchase of receivables rather than a loan.

Implication: In legal terms, these factors are crucial because they help define whether the financial instrument should be treated as a loan, subject to usury laws (which limit the amount of interest that can be charged), or as a different mechanism where such laws do not apply. If the agreement is deemed a loan, it must not exceed the statutory interest rates; otherwise, it could be considered usurious, which is illegal. However, if it is determined as a purchase of receivables with risk shared between the parties, it may not be bound by these restrictions, even if the cost to the seller (or borrower) is high.

Evaluating Merchant Cash Advance Agreements for Usury and Racketeering Claims

In K9 Bytes, Inc. v. Arch Capital Funding, LLC, the Supreme Court of Westchester County, New York, addressed claims brought by merchants against funding companies, alleging usury and racketeering concerning their merchant cash advance agreements. The court examined whether these agreements constituted loans subject to usury laws or valid purchases of future receivables.

Key Points of Law:

  1. To determine if a transaction is a loan subject to usury laws, the court must examine whether repayment is absolute or contingent on the merchant's success, considering factors such as reconciliation provisions, indefinite term, and recourse in case of bankruptcy.
  2. Unconscionability is a defense, not an actionable claim, and prima facie tort requires a showing of "disinterested malevolence" as the sole motive for the defendant's actions.
  3. Under New York law, a corporation can only assert criminal usury as a defense, not as an affirmative claim for relief.


The main takeaway from this case is that the presence of certain provisions in merchant cash advance agreements, such as reconciliation clauses and indefinite repayment terms, can support the characterization of these transactions as purchases of future receivables rather than loans subject to usury laws. The court dismissed the usury and racketeering claims against one defendant whose agreement contained these provisions while allowing similar claims to proceed against another defendant whose agreement lacked a reconciliation provision.

Case Citation: K9 Bytes, Inc. v. Arch Capital Funding, LLC, 57 N.Y.S.3d 625, 628–34 (N.Y. Sup. Ct. 2017)

Evaluating Merchant Cash Advance Agreements for Usury, Coercion, and Unconscionability Claims

In 92 Palm Foods LLC v. Fundamental Capital LLC, the Supreme Court of New York addressed claims brought by a merchant and guarantor against a merchant cash advance provider, alleging that the confession of judgment should be voided due to coercion, criminal usury, and unconscionability. The court examined the merchant cash advance agreement to determine whether it constituted a loan subject to usury laws or a valid purchase of future receivables.

Key Points of Law:

  1. To determine if a merchant cash advance agreement is a loan subject to usury laws, the court must consider three factors: (a) the presence of a reconciliation provision allowing the merchant to seek an adjustment of amounts taken based on cash flow; (b) whether the agreement has a finite term; and (c) whether there is any recourse for the provider if the merchant declares bankruptcy.
  2. Generalized contentions of coercion, such as allegations of "high pressure tactics" or "implied threats," are insufficient to plead a cause of action for coercion, which requires specific factual allegations demonstrating that the party was forced to agree to the contract using a wrongful threat precluding the exercise of free will.
  3. Allegations of unconscionability may be undermined if the plaintiffs are sophisticated business people with prior experience in similar merchant cash advance agreements.


The main takeaway from this case is that the presence of a reconciliation provision, an indefinite repayment term, and the lack of recourse for the provider in the event of the merchant's bankruptcy support the characterization of a merchant cash advance agreement as a purchase of future receivables rather than a loan subject to usury laws. The court dismissed the plaintiffs' claims of coercion and unconscionability due to insufficient factual allegations and evidence of the plaintiffs' prior experience with similar agreements.

Case Citation: 92 Palm Foods LLC v. Fundamental Capital LLC, 195 N.Y.S.3d 636 (N.Y. Sup. Ct. 2023)

Sidenote: Example of a "Reconciliation Provision":

92 Palm Foods LLC v. Fundamental Capital LLC contained the following provisions as analyzed in the above summary:

Paragraph 1.18 of the Merchant Agreement, entitled “Adjustments to the Specific Daily Amount” clearly allows the Merchant to seek an adjustment of the amounts taken from the account. The Agreement States:

¶ 1.18.1 ..... Additionally, if Merchant has not defaulted under this Agreement, Merchant may request that [the Purchaser] reconcile Merchant's actual receipts and adjust the Specific Daily Amount so that the amount received by [the Purcharer in the future more closely represents the Specified Percentage.

¶ 1.18 2. Merchant may request a reconciliation by sending [the Purchaser] a request in writing, including by email, and including a copy of Merchant's most recent bank statements or credit card statements (which statements shall also include the Merchant's bank account report showing transactions in the month to date). Upon receipt of a written reconciliation request from Merchant, FC may request any and all information from Merchant that [the Purchaser], in its sole judgment, believes is necessary to accurately reconcile the amount [the Purchaser] has received from Merchant with the actual Specified Percentage. [The Purchaser] shall not be required to adjust the Specific Daily Amount until such time as it has received all such requested information. After each adjustment made pursuant to this paragraph, the new dollar amount shall be deemed the Specific Daily Amount until any subsequent adjustment. 92 Palm Foods LLC v. Fundamental Capital LLC, 195 N.Y.S.3d 636 (N.Y. Sup. Ct. 2023)

In conclusion, the reconciliation provision in the Merchant Agreement allows the merchant to request adjustments to the daily amounts taken from their account based on actual cash flow, which is a key factor in determining whether the agreement constitutes a loan or a purchase of future receivables. The court's finding that the express language of the reconciliation provision satisfies the first prong of the LG Funding, LLC test underscores the importance of carefully drafting and reviewing merchant agreements to ensure they are not characterized as loans subject to usury laws.

Restrictions and Exceptions on Usury Defenses for Corporations in New York State

Under New York General Obligations Law § 5-521(1), corporations are generally restricted from using usury as a defense in lawsuits, except under specific circumstances. Section 5-521(3) allows corporations to assert a defense of criminal usury when interest rates exceed 25% per annum. This exception is purely a defensive measure, not a vehicle for a corporation to initiate a claim to recover usurious payments. In the context of the Intima-Eighteen, Inc. v. A.H. Schreiber Co., Inc. case, and later referenced in LG Funding, LLC v. United Senior Properties of Olathe, LLC, the appellate court upheld that this statutory exception is strictly limited to defenses against repayment demands of a loan, disallowing its use to proactively seek recovery of an overpaid interest by a corporate borrower. For individuals, the maximum permissible interest rate is 16% per annum (GOL § 5-501(1)), with any agreement exceeding this rate deemed usurious and void, thereby nullifying the obligation to repay principal or interest. However, a strong legal presumption against findings of usury exists, reinforcing the necessity for clear evidence of usurious intent or terms. Additionally, usury defenses are inapplicable where the note's terms stipulate a rate exceeding the statutory maximum only after default or maturity.

Key Legal Principles:

  1. Prohibition of Usury Defense by Corporations: General Obligations Law § 5-521(1) generally prevents corporations from using usury as a defense, which aligns with the principle that corporate entities are expected to engage in loans under terms they are presumed to have evaluated thoroughly.

  2. Exception for Criminal Usury: Under GOL § 5-521(3), corporations can defend against claims where the interest rate exceeds 25% per annum, characterizing such rates as criminally usurious. This provision underscores the legal boundary meant to protect corporate entities from excessively predatory lending practices.

  3. Non-Recovery of Usurious Payments: As established in Intima-Eighteen, Inc. v. A.H. Schreiber Co., Inc., 172 A.D.2d 456, 568 N.Y.S.2d 802 (1st Dep't 1991), and reiterated in LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664, 122 N.Y.S.3d 309 (2d Dep't 2020), the defense of usury is strictly a shield against repayment, not a sword for recovery. This interpretation aims to limit the exploitation of usury laws by corporate borrowers.


The legal landscape in New York sets a clear delineation on how and when usury defenses can be employed, particularly emphasizing protection against predatory lending without enabling strategic exploitation of these defenses by corporate entities. The adherence to strict statutory guidelines ensures that usury claims are carefully scrutinized, supporting fair lending practices while maintaining a robust defense against genuine instances of usurious exploitation.

Plaintiff's Failure to Establish Validity of Agreement Containing Alternative Service of Process Provisions

In Wynwood Capital Group LLC v. Confluence Corporation, the Supreme Court of Kings County dismissed a breach of contract action due to lack of personal jurisdiction. The plaintiff claimed that the defendants were properly served according to the terms of a merchant cash advance agreement, which provided for alternative methods of service. However, the court found that the plaintiff failed to establish the validity of the agreement and, consequently, could not rely on its alternative service provisions.

Key Points of Law:

  1. Parties to a contract may agree to alternative methods of service of process, rendering inapplicable the statutes that normally govern service.
  2. The burden of proving the existence, terms, and validity of a contract rests on the party seeking to enforce it.
  3. To establish the validity of a contract, the party relying on it must provide evidence of its authenticity, such as through a certificate of acknowledgment, comparison of handwriting, or testimony from a witness to the signing of the document.


This case underscores the importance of establishing the validity of a contract when relying on its alternative service of process provisions to establish personal jurisdiction. Plaintiffs must provide sufficient evidence to prove the authenticity and enforceability of the agreement. Failure to do so may result in the dismissal of the action for lack of personal jurisdiction.

Case Citation: Wynwood Capital Group LLC v. Confluence Corp., No. 503752/2024, 2024 WL 2479615 (N.Y. Sup. Ct. May 10, 2024).

Vacating a Default Judgment Due to Lack of Proof of Proper Service by Certified Mail

In Reserve Funding Group LLC v. JL Capital Holdings LLC, the Supreme Court of Kings County vacated a default judgment entered against the defendants due to the plaintiff's failure to provide proof of proper service of the summons and complaint by certified mail, as allegedly agreed upon in a Revenue Purchase Agreement (RPA) between the parties. The court held that without evidence of the date the defendants received the commencement papers, the plaintiff could not establish that the defendants' time to appear in the action had been triggered.

Key Points of Law:

  1. Parties to a contract may agree to alternative methods of service of process, rendering inapplicable the statutes that normally govern service.
  2. When service is made by certified mail, return receipt requested, the time to respond is calculated from the date of the recipient's actual receipt of the documents.
  3. To obtain a default judgment, the plaintiff must establish that the defendant's time to appear or answer has expired, which requires proof of the date of service completion.


This case highlights the importance of providing proper proof of service when relying on alternative methods of service agreed upon by the parties. Plaintiffs seeking a default judgment must demonstrate that the defendant's time to respond has expired, which necessitates evidence of the date the defendant received the summons and complaint. Failure to do so may result in the vacatur of the default judgment.

Case Citation: Reserve Funding Grp. LLC v. JL Capital Holdings LLC, No. 514245/2022, 2022 NY Slip Op 51322(U) (Sup. Ct. Kings Cnty. Oct. 17, 2022).

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[1] When are Merchant Cash Advances Loans? When Do They Cross the Line?(reflecting a conditional repayment structure contingent on actual business revenue, distinguishing it from traditional loans where repayment is unconditional).

[2] What are the Key Differences Between a Merchant Cash Advance and a Business Loan? (Discusses the contrasts between traditional business loans, which have lower cost but stricter requirements and delayed funding, and Merchant Cash Advances (MCA), which provide flexible, quick funding based on future sales, accessible even to those with poor credit.)

[3] When are Merchant Cash Advances Loans? When Do They Cross the Line? (Reflecting a conditional repayment structure contingent on actual business revenue, distinguishing it from traditional loans where repayment is unconditional).

[4] Merchant Loan or Merchant Cash Advance: What’s The Difference? (Compares merchant loans—traditional, structured financing—and merchant cash advances (MCA), which offer quick funding with higher costs but easier approval.)

[5] Navigating Repayment Terms: Understanding the Dynamics of Merchant Cash Advances (A guide on the repayment mechanisms of Merchant Cash Advances (MCA), including the flexible repayment tied to daily sales, the significance of holdback rates, and the overall cost reflected in the factor rate.)

[6] Is a Merchant Cash Advance Right for Your Business? (Examines the high costs and potential risks of merchant cash advances (MCA) compared to other small business financing options, emphasizing that MCAs should be considered only after exploring less expensive alternatives.)

[7] Merchant Cash Advance (Details Merchant Cash Advances (MCA) as a financing method where businesses receive upfront capital in return for a portion of future sales, suitable for companies needing immediate funds but potentially costly and less regulated compared to traditional financing options.)

[8] Merchant Cash Advance Guide for Small Businesses (Describes MCAs for rapid, flexible funding for small businesses, with “easy” applications and variable repayments based on sales. Highlights that MCAs, initially for retailers, now aid tech startups too, and don’t help build business credit.)