NY Bankruptcy Court Rules Funder’s MCAs Were Really Loans

A New York bankruptcy court has reclassified nearly $11 million in Merchant Cash Advances (MCAs) as high-interest loans rather than sales of future receivables. This ruling is a major warning for any merchant or financing provider using MCA products. For years, the industry operated under the assumption that MCAs were not loans and therefore not subject to state usury laws (interest rate caps). This court disagreeed. The judge found that because the funder had no real risk of loss and the repayment terms were fixed, the agreements were effectively loans. For retailers and operators, this means the legal 'shield' protecting MCA providers is thinning. If you use these products to fund your operations, you may have more leverage in restructuring debt if the terms are deemed illegal under state law. However, it also suggests that these types of funding sources may become harder to access or more expensive as funders face increased legal scrutiny and potential lawsuits. The court used a 'holistic' approach to look past the contract language and see how the money was actually collected, signaling that 'calling it a cash advance' is no longer enough to avoid regulation.

Source: deBanked

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