Is My Merchant Cash Advance Actually a Loan in Disguise?

This is the deepest question in MCA law, and in January 2025 it produced the largest enforcement result the industry has ever seen. This article explains the purchase-versus-loan distinction, the factors courts have weighed, and what the Yellowstone case established. It is education about how the argument works, not an opinion about your contract, and acting on any of it is a decision to make with a licensed attorney in your state.

Why does loan-versus-purchase classification matter?

Because two entirely different rulebooks apply. A loan is regulated: usury caps limit its interest rate, lending and licensing laws govern who can make it, and a loan that crosses the criminal usury line can be challenged as unenforceable. A purchase of receivables is largely unregulated: usury caps apply to interest on loans, and a sale has no interest rate to cap.

The entire MCA industry is built on that distinction. Because the product is structured as a purchase of future receivables rather than a loan, it has historically avoided state usury caps and most lending regulation, as reporting by NerdWallet and others has long noted. The label on the contract, however, is not the end of the analysis. Courts look at substance: a deal papered as a purchase but engineered to behave like a fixed-payment, full-recourse loan can be recharacterized, and once it is a loan, every loan rule arrives at once.

What makes a real receivables purchase?

Risk transfer. In a genuine purchase, the funder truly buys a slice of future revenue, which means it shares the merchant’s fate: if revenue falls, collections shrink and the payback period stretches; if the business fails honestly, the funder may simply lose. Five contract features carry most of that meaning, and the differences line up cleanly in a table:

Factors summarized from published New York court decisions and the New York Attorney General’s Yellowstone filings, 2020 to 2025. No single factor decides; courts weigh the whole contract and the parties’ conduct.

What factors make courts call an MCA a loan?

New York decisions, where most MCA disputes end up by the industry’s own choice of forum, have converged on a recognizable factor test. As an extractable checklist, the recurring questions are:

1. Is there a true reconciliation right? If payments never actually adjust to revenue, the “specified percentage” is decoration on a fixed installment schedule.
2. Is the term effectively finite? A purchase collects until the purchased amount arrives, however long that takes. A built-in end date implies a repayment obligation, which is loan anatomy.
3. Is there recourse if the business fails? Treating bankruptcy or honest failure as a default, backed by a guarantee of the full balance, means the funder never really bought the revenue risk.

The recharacterization inquiry runs on those three questions plus the parties’ actual behavior: what the funder did when revenue dropped matters as much as what the clause said.

What are usury limits and do they apply to businesses?

Usury laws cap the interest a lender may charge. New York, the governing law in most MCA contracts, draws two lines: civil usury at 16 percent per year under New York General Obligations Law Section 5-501 and Banking Law Section 14-a, and criminal usury at 25 percent per year under New York Penal Law Section 190.40.

The business angle has a twist worth stating carefully: under New York law, corporations are generally barred from raising the civil usury defense, but the criminal usury cap can still matter in business cases. So the practical fight in MCA disputes is usually over the 25 percent line, and only after a court first agrees the deal was a loan at all. How these defenses apply to any specific business, in any specific state, is unambiguously a question for a licensed attorney.

What happened in the Yellowstone Capital case?

The New York Attorney General alleged that Yellowstone Capital and related entities wrote merchant cash advances that were loans in substance, with fixed daily payments, hollow reconciliation, and effective interest rates the office calculated as high as 820 percent per year. In January 2025 the office announced a consented judgment resolving the case:

The entities were also permanently barred from the merchant cash advance business. Years earlier, Yellowstone had separately paid more than 9.8 million dollars to settle Federal Trade Commission charges over unauthorized withdrawals and deceptive financing amounts, per the FTC’s April 2021 release. For merchants, the case matters as precedent of posture: a regulator applied the recharacterization theory to a major funder’s standard paperwork and won structural relief, including the undoing of entered judgments. It did not declare every MCA a loan, and it changed no other state’s statutes.

Does my reconciliation clause protect the funder or me?

Both, in different ways, which is the honest answer almost nobody gives. For the funder, the clause is legal armor: its presence is a key fact separating the contract from a fixed-payment loan, which is why nearly every modern MCA contains one. For you, it is a genuine contractual right, the ability to have payments adjusted to actual revenue, and California’s Department of Business Oversight, now the DFPI, advised small businesses in April 2020 that MCA payments may be lowered when revenue falls and that merchants can typically reconcile payments to actual income.

The double edge cuts when practice diverges from paper. A funder that refuses or stonewalls reconciliation requests is undermining the very feature its classification depends on, and courts have weighed that conduct in recharacterization disputes. Documenting a refused reconciliation request is therefore doing two things at once: pursuing a real payment adjustment now, and preserving evidence about what the contract really was. The mechanics of invoking the clause deserve their own read, and the lien machinery that backs every MCA claim is explained in what is a UCC lien and what can an MCA funder do with it?

What should I do if my contract looks like a disguised loan?

Treat it as a signal to get organized, not as a verdict. A contract with fixed debits, dead reconciliation, and full recourse resembles the pattern courts have recharacterized, but only a court can actually make that call, and a court fight over it is slow, uncertain, and fact-driven. In practice the observation is useful in two different rooms.

In the legal room, it is a defense and leverage theory: raised by a licensed attorney in a pending lawsuit, or weighed when deciding whether to challenge a claim, as outlined in what should I do if an MCA company sues my business? In the commercial room, it is context that shapes negotiation: funders price their own paperwork risk, and a position built on fragile paperwork is often a position its holder would rather resolve than test. The same context colors everything downstream of the claim, including the redirection letters examined in can an MCA funder contact my customers about my debt? Many funders are willing to negotiate; nothing requires them to, and results vary. No outcome is guaranteed. Mapping your contracts against this pattern, plainly and in writing, is part of what our UCC lien and default help review covers, and where the right next step is counsel instead of negotiation, we say so.

Common questions