Quick Summary:
Merchant cash advances may look like loans from the outside, but they have a different legal classification, meaning most consumer and business lending protections don’t apply. This distinction has major legal consequences for business owners who often aren’t aware of the difference. If you have an MCA agreement and are struggling with repayment or think the terms are unfair, a merchant cash advance attorney may be able to help.
A merchant cash advance (MCA) is an alternative type of business financing. While it involves borrowing money from a lender, its legal structure, the laws that govern it, and your rights as a borrower are different from those of a traditional business loan.
How a merchant cash advance is structured
An MCA is a purchase of future receivables. When the funder gives you the money, they purchase a specified amount of your future revenue — either credit card receipts or total revenue — at a discount. In exchange, you pay them back what you’ve borrowed and more.
Struggling with your debt?
MCA repayment is made through automatic daily or weekly payments. These payments are usually a percentage of your sales. If your revenue declines, so do your payments
Rather than interest, MCAs charge a factor rate. For example, if your MCA has a factor rate of 1.5, you repay $1.50 for each dollar you borrowed. Because of this fee structure, you’ll pay the same amount regardless of whether you repay the balance early.
Why the legal label matters
The word “advance” isn’t just marketing language — it’s a structural designation that determines which laws govern the agreement. And in many cases, it allows funders to avoid lending and borrowers’ rights laws.
MCA providers argue that MCAs are a “true sale” of receivables rather than a loan. This factor allows them to circumvent certain state and federal regulations, including interest rate caps, disclosure requirements, and remedies if a funder overreaches.
In some cases, an agreement marketed as an MCA will be treated as a loan in court, depending on the contract’s terms.
Legal and Regulatory Differences
Understanding which laws do and do not apply to your MCA is essential to knowing your options and rights. Unfortunately, the regulatory picture is more complex than many small business owners realize.
Why lending laws typically don’t apply to MCAs
Because MCAs are asset sales rather than extensions of credit, the Truth in Lending Act (TILA) doesn’t usually apply. This law requires lenders to disclose APRs and total financing costs.
Additionally, state usury laws, which cap interest rates on loans, usually don’t apply to non-loan advances like MCAs. These arrangements have a factor rate rather than an interest rate.
Unfortunately for borrowers, these differences allow MCA funders to charge factor rates that equate to hundreds of percent per year in interest without being required to disclose what that rate actually is.
Licensing requirements and state-specific treatment
The regulatory landscape for MCAs varies from state to state. In many states, MCA funders aren’t subject to the same licensing rules and regulations as traditional business loan lenders. However, that’s slowly changing.
For example, New York, California, Utah, and Virginia have commercial financing disclosure laws, requiring lenders (including MCA companies) to disclose factor rates, sometimes as an APR equivalent. However, they don’t necessarily hold them to the interest rate caps that traditional loans are held to, nor do they exist in all states.
In some jurisdictions, courts have gone even further than state legislatures. When they find an MCA agreement that lacks genuine contingency on the performance of receivables, they’ve recharacterized the agreement as a loan. That simple change opens the door to protections for borrowers.
How Repayment Works — and Rights Merchants Often Don’t Know They Have
Many business owners get into MCAs without fully understanding how repayment works or how it will affect them. The good news is you may have some rights built into the contract that you haven’t invoked.
Variable payments and reconciliation rights
MCAs usually have variable payments that fluctuate with your business revenue. Many also include reconciliation clauses that allow you to adjust your payments if the remittances exceed the agreed-upon percentage of your sales.
In practice, this right is often overlooked by borrowers. Your funder may wait for you to push for lower payments rather than proactively do it themselves. And if you don’t invoke this right, you could be overpaying on your MCA.
No fixed maturity date
Because payments are dependent on your revenue, your MCA has no set payoff date. The time it takes to pay off depends on how much your business earns.
These variable payments don’t affect the factor rate. It applies to the full purchase of receivables, regardless of how long it takes you to pay off the balance. Unlike with traditional bank loans, paying off your MCA early doesn’t reduce the total price tag.
Non-recourse vs. limited recourse
MCAs are sometimes marketed as a type of non-recourse financing, meaning the fund shouldn’t be able to pursue you personally if your business fails. If your business goes out of business, the funder simply doesn’t get their money.
In practice, that’s not how it usually works. Most MCA agreements have personal guarantees, where the business owner promises to be personally liable for any debt the business can’t repay. Additionally, breach carve-outs are standard in these agreements. If the funder claims you breached the agreement, you could be personally liable for the full amount.
Common Misconceptions That Leave Business Owners Vulnerable
Why merchants often don’t realize an MCA isn’t a loan
The marketing language used around MCAs blurs the distinction between these and loans. Many business owners go into these arrangements thinking they’re taking out a loan, and assuming they’ll have the same regulatory rights as loan borrowers.
Unfortunately, MCA funders rarely fill in the gaps for borrowers. They may not be forthcoming about the protections you do or don’t have, and you don’t realize it until it’s too late.
Warning signs of a predatory or disguised loan structure
Not all MCAs are treated equally, and some may be considered predatory or hidden loans by courts. One of the biggest red flags to look out for is a fixed daily payment with no reconciliation. If you can’t lower your daily payment when your revenue declines, you may legally have a loan rather than an MCA.
Courts have sometimes recharacterized MCAs in these cases as loans. This benefits the business owner, as it gives them all of the protections that other loan borrowers have.
When the distinction can be challenged
If your MCA has characteristics more consistent with a loan than a true purchase of receivables, you may be able to have it recharacterized as a loan. A merchant cash advance attorney can review the specific contract language and governing law to advise you on whether your MCA may be considered a loan in your state.
FAQ
Is a merchant cash advance considered a loan?
A merchant cash advance isn’t technically considered a loan, meaning it’s not subject to the same regulations as business loans. However, some MCAs may be recharacterized as business loans if the contract doesn’t reflect a true purchase of receivables.
What laws protect me if I have a merchant cash advance?
MCAs are subject to fewer laws and regulations than business loans. For example, the Truth in Lending Act and most state usury laws don’t apply. You may have protections in some states that require the funder to disclose financing costs. Additionally, having your MCA recharacterized as a business loan opens you up to far more protections.
Can a merchant cash advance company charge unlimited rates?
Unfortunately, yes, most MCA funders can charge unlimited factor rates. State usury laws that cap interest rates don’t typically apply to MCAs, allowing companies to charge as much as they want.
What is a reconciliation clause and do I have one?
A reconciliation clause allows you to request a payment adjustment if your business revenue declines. It’s one of the few protections available to MCA borrowers, and most agreements have one that many business owners aren’t aware of. If your agreement doesn’t have a reconciliation provision, a court may recharacterize your agreement as a loan.
Can an MCA funder sue me if my business closes?
If you signed a personal guarantee when you took out your MCA, then your funder can likely sue you personally and also if your business fails. An MCA attorney can review your specific contract to tell you if that’s the case.
Next Steps
The distinction between an MCA and a business loan isn’t just a marketing difference. It determines which laws govern your agreements and which legal protections you’re entitled to. Unfortunately, many business owners don’t realize until it’s too late that their MCA doesn’t come with all the same rights and protections as traditional business loans. If that happens, a lawyer may be able to help.
The attorneys at Tayne Law Group have combined more than three decades of experience helping borrowers like you navigate complex lending relationships. As a client we can review your MCA agreement, identify overlooked rights and protections, and help you understand your options under the law. To learn more, call (866) 890-7337 or fill out our short contact form to set up a free phone consultation. We never share or sell your information, and all conversations are confidential.