The legal issues with a merchant cash advance almost always come down to four fights: whether the deal is really a loan dressed up as a receivables purchase, how expensive it actually is once you annualize the factor rate, what the funder can do to you on default, and whether the personal guarantee you signed will follow you home. Each of these has real defenses attached, but the defenses work best before an account freeze, not after.
Is It Really a Loan?
MCA companies structure their agreements as the purchase of a slice of your future revenue at a discount. That framing keeps the transaction outside state lending laws and interest rate caps. If a court decides the deal is actually a loan, the entire agreement becomes vulnerable to usury challenges, licensing violations, and regulatory scrutiny.
Courts look at whether the funder genuinely bears the risk that your business earns less than expected. The hallmark of a loan is an absolute right to repayment regardless of what happens to the business. A true sale means the funder’s return rises and falls with your actual sales. Three features drive the analysis:
- A reconciliation provision that lets you request a payment adjustment when revenue drops. If the contract lacks one, or the funder ignores requests to use it, courts are more likely to treat the fixed payments as debt.
- A finite repayment term. A hard end date by which you must repay regardless of sales looks like a loan maturity, not an open-ended purchase.
- Bankruptcy recourse. If the funder can demand full repayment when you file bankruptcy or close the business, it has not truly accepted the risk of business failure.
When all three point toward absolute repayment, the “purchase” label on the contract does little to protect the funder from recharacterization.
The True Cost Hidden in the Factor Rate
MCAs price capital with a “factor rate” rather than an APR. A $50,000 advance at a 1.3 factor rate means you owe $65,000 back. That looks like a $15,000 cost until you notice the repayment window is often three to nine months. A $15,000 cost repaid over six months translates to an effective APR well above 60%, and shorter windows push it much higher.
Those rates collide with criminal usury statutes. Many states set criminal usury thresholds at 25% or slightly above.1NY Department of Financial Services. Banking Interpretations – Banking Law October 12 2010 When a recharacterized MCA carries an effective APR of 100% or more, the gap between the contract rate and the legal ceiling is enormous. A successful usury defense can void the interest obligation entirely and reduce the debt to the principal that was actually advanced. In some jurisdictions, criminal usury voids the whole agreement and the funder loses its right to collect anything.
The factor rate structure is part of the problem in its own right. Because the cost is expressed as a flat multiplier, many owners do not realize how expensive the capital is until they try to compare it to a bank loan or SBA product. That opacity is exactly what several state disclosure laws are now trying to fix.
Confessions of Judgment
The confession of judgment clause has been the most punishing enforcement tool in the industry. By signing one, you agree in advance to let the funder obtain a court judgment without filing a lawsuit, presenting evidence, or giving you any notice. A court clerk stamps the paperwork the same day it arrives, and the funder can immediately freeze bank accounts or seize assets.2U.S. House of Representatives. Hearing – Crushed by Confessions of Judgement The Small Business Story The merchant often finds out only after the accounts are already frozen.
MCA funders historically concentrated these filings in New York, whose courts processed them with minimal scrutiny. Funders required merchants in other states to consent to New York jurisdiction, filed the confession there, and used the resulting judgment to collect back home. A 2019 amendment restricted where a confession of judgment can be filed: only in the county where the defendant resided when the affidavit was signed or where they reside at the time of filing.3New York State Senate. Senate Bill 2019-S6395 For a business entity, that means any county where it has a place of business. The change effectively ended the practice of filing against out-of-state merchants with no real connection to New York.
If a confession of judgment has already been entered against you, the remedy is a motion to vacate. Grounds include improper execution, fraud or misrepresentation by the funder, an argument that the confession violates the public policy of your home state, and, increasingly, arguments that the filing violated the 2019 jurisdictional restrictions.4New York State Senate. New York Code CVP – Article 32 3218 Vacating the judgment does not eliminate the debt, but it forces the funder to actually litigate, which often exposes weaknesses in the underlying agreement.
The Collection Tools You Already Agreed To
Confessions of judgment get most of the attention, but the standard MCA contract gives the funder several other levers, and each one can be equally disruptive.
UCC-1 Liens
Most MCA agreements require you to grant a security interest in the business’s assets, particularly receivables. The funder files a UCC-1 financing statement with the state to perfect that interest. After a default, a perfected security interest lets the funder collect directly from your account debtors, take possession of collateral without going to court so long as there is no breach of the peace, and sell the collateral in a commercially reasonable manner. The practical effect is that a UCC-1 lien can also block you from obtaining other financing, because any new lender will see the existing lien and either decline or demand a subordination agreement.
ACH Withdrawals
MCA agreements almost always authorize the funder to withdraw payments directly from your business bank account through the ACH network. These daily or weekly debits are how most MCAs collect. When a business hits a rough patch, the relentless withdrawals can drain the operating account and trigger a cascade of bounced checks and missed obligations.
You do have the legal right to revoke ACH authorization. Federal banking regulations and the NACHA operating rules allow a receiver to revoke by notifying both the bank and the company initiating the debits. Contract language calling the authorization “irrevocable” is generally unenforceable because federal banking rules override it. But revoking while the agreement is still in effect almost certainly triggers a default, which can accelerate the full balance and activate the personal guarantee. Revoking ACH is a defensive move, not a consequence-free exit.
Personal Guarantees
Most MCA agreements require the business owner to sign a personal guarantee alongside the business’s obligation. That creates a separate liability that follows you individually. If the business closes, files bankruptcy, or simply cannot pay, the funder can pursue your personal bank accounts, wages, home equity (subject to state exemption laws), vehicles, and investment accounts. Most MCA guarantees waive the requirement that the funder exhaust remedies against the business first, so the funder can skip the business entirely and go straight after you.
An unlimited guarantee exposes everything you have. A limited guarantee caps personal liability at a specified dollar amount. Many merchants sign unlimited guarantees without fully appreciating what they are agreeing to, especially when the guarantee is bundled into a dense contract alongside the main MCA terms. The guarantee can survive even if the underlying MCA is later challenged as usurious, because courts may treat the guarantee as a separate agreement.
Stacking Turns One Problem Into Two
Stacking means taking a second or third MCA while the first is still being repaid. Nearly every MCA contract prohibits additional advances without the first funder’s consent. Taking a second advance in violation of that clause triggers a default on the first, which can accelerate the entire remaining balance, activate the personal guarantee, and set off every enforcement tool listed above. You end up with two funders pursuing accelerated balances at the same time instead of one collecting at the original pace.
Stacking is a common trap for businesses already struggling with cash flow. A second advance feels like a lifeline, but it doubles the daily withdrawal burden and compounds the legal exposure. The second funder faces risk too: the first may sue for tortious interference, arguing the second knowingly induced you to breach the exclusivity clause. Treat the exclusivity clause in your existing agreement as a hard stop, not a suggestion.
What States and Federal Agencies Now Require
More than ten states have enacted commercial financing disclosure laws designed to force transparency regardless of whether the product is classified as a sale or a loan. These laws require MCA providers to give you consumer-style disclosures before you sign, including the total amount funded, the total repayment amount, the payment schedule, and an estimated APR or APR-equivalent. The goal is to let you compare the actual cost of an MCA to a conventional loan or line of credit, something the factor rate alone makes nearly impossible. Several of these states also require MCA providers to register with the state banking regulator or obtain a commercial financing license, which puts them under ongoing examination and complaint processes. Most of these laws took effect between 2022 and 2025, and more states are considering similar legislation.
One limitation: federally chartered national banks that offer MCA-like products may be exempt from state disclosure and licensing requirements under the National Bank Act, because federal regulations let national banks make non-real estate loans without regard to state law limitations on licensing, registration, and disclosure.5eCFR. Subpart D Preemption Most standalone MCA funders are not national banks, so this rarely helps the typical funder, but bank-affiliated products can operate under different rules.
At the federal level, the FTC has authority to pursue MCA companies that engage in unfair or deceptive practices under Section 5 of the FTC Act.6Office of the Law Revision Counsel. 15 USC 45 – Unfair Methods of Competition Unlawful In one enforcement action, the agency sued an MCA company for misrepresenting the terms of its advances, making unauthorized withdrawals from merchants’ accounts, and using confessions of judgment to seize assets in ways the contracts did not permit. The court found extensive misconduct violating both the FTC Act and the Gramm-Leach-Bliley Act and permanently banned the owner from the industry.7Federal Trade Commission. FTC Case Leads to Permanent Ban Against Merchant Cash Advance Owner for Deceiving Small Businesses Seizing Personal and Business Assets The CFPB has separately confirmed that merchant cash advances are covered credit transactions under its small business lending data rule, rejecting the argument that MCAs fall outside “credit” because they are structured as receivables purchases.8Consumer Financial Protection Bureau. Small Business Lending Rule FAQs
Defenses If You Are Already in Trouble
If a funder is coming after you, several defenses are available. None are automatic wins. Each depends on the specific contract language and the facts of the default.
Usury
Arguing that the MCA is a usurious loan is the most powerful defense when it succeeds. You have to show that the funder’s right to repayment was effectively absolute rather than genuinely contingent on the business earning revenue. Evidence that the funder never adjusted payments downward during slow periods, that the contract lacked a meaningful reconciliation process, or that the funder had full recourse in bankruptcy all support recharacterization. If the court agrees the transaction was a loan and the effective APR exceeds the state’s usury ceiling, the interest obligation can be voided. In some states, criminal usury voids the entire contract.
Breach of the Reconciliation Clause
Many MCA agreements entitle you to reduced payments when revenue declines. If the funder collects fixed payments regardless of your sales and ignores reconciliation requests, you have a breach of contract claim. This defense does double work: it is a standalone claim for damages and it is evidence that the transaction was really a loan, because a funder that refuses to reconcile is effectively demanding absolute repayment. Courts have also noted that if you never actually invoked the reconciliation process, it becomes hard to argue the process was illusory. Always request reconciliation in writing and keep the funder’s response.
Motion to Vacate
When a funder has already obtained a judgment through a confession of judgment, the primary remedy is a motion to vacate, as described above. Success does not erase the underlying debt, but it forces the funder into a normal lawsuit where all your other defenses can be raised.
Bankruptcy
Bankruptcy adds a separate layer. The sale-vs.-loan distinction matters here too. If the MCA is treated as a loan with a security interest in receivables, the funder’s pre-petition claim generally does not extend to receivables generated after the filing.9U.S. Bankruptcy Court Northern District of Florida. Merchant Cash Advance Claims in Bankruptcy If it is treated as a true sale, any post-petition transfers to the funder must comply with the Bankruptcy Code’s requirements for asset sales, and unauthorized transfers can be avoided. In practice, many MCA creditors end up with unsecured claims because the business has little or no receivable value at filing. The automatic stay also halts all collection activity, including ACH withdrawals and enforcement of confessions of judgment.