Merchant Cash Advance Breach of Contract: Claims and Defenses
What the funder must prove, the records to gather, and the defenses and damages to review.
Has a merchant cash advance funder sued your business for breach of contract? The complaint probably says you defaulted and now owe the full remaining balance plus fees. It may also name you personally as a guarantor. That claim isn’t automatically true. The funder still has to prove its case, and MCA agreements raise defenses that ordinary loan contracts don’t.
This guide covers what a breach claim alleges, what the funder has to prove, the records that matter, common defenses and what the funder may seek in damages. It uses New York examples. Governing law, court procedures and available defenses vary by agreement and state.
What Is a Breach of an MCA Contract?
A breach happens when one side fails to do something the agreement requires. In an MCA, the business usually promises to let the funder collect a percentage of its receivables, often through daily or weekly ACH debits, until a fixed “purchased amount” is paid.
Most agreements list “events of default,” and a default clause often lets the funder demand the unpaid balance, add fees and pursue any guarantor. But a breach claim isn’t limited to clauses labeled that way. The question is which contractual obligation the funder says was violated.
MCAs are usually written as purchases of future receivables, not loans. Courts look at the substance of the deal, not just its label (LG Funding v. United Senior Props. of Olathe). When revenue declines, the question is how the agreement’s receivables, reconciliation and default provisions treat that decline. For more, see when merchant cash advances are treated as loans.
What an MCA Funder Must Prove
Under New York law, a breach of contract claim generally requires four things. The funder carries the burden on each one.
- A valid contract. The funder must show an enforceable agreement. Whether the agreement is void as a usurious loan is a separate question, raised as a defense (see below).
- The funder’s own performance. The funder must have paid the purchase price it promised. Fees or deductions the agreement permits aren’t nonperformance by themselves, but check that what you received matches the agreement.
- A breach by the business. The funder must identify an obligation in the agreement that the business violated, whether or not it is labeled an “event of default.” A missed or returned payment alone may not qualify.
- Damages. The funder must prove its loss under the agreement’s terms. What it can recover depends on the contract and the facts. There is no single formula.
If the funder can’t prove one of these, the claim can be challenged. Defenses work differently. The business raises them and must prove them, and the burden for proving usury is demanding.
What MCA Agreements Usually Call a Breach
Every agreement is different, but these “events of default” show up often:
- Blocking or stopping the funder’s ACH debits
- Changing or closing the bank account the funder debits
- Switching credit card processors without permission
- Taking another MCA without the funder’s consent (“stacking”)
- Selling, closing or transferring the business
- Giving false information in the application
- Failing to provide bank statements or other requested records
A complaint will usually say which of these you allegedly did, or point to another obligation, such as a duty to provide records. Compare that against the exact wording of your agreement. A returned payment is not always a default under the contract’s own terms. For what typically happens after an alleged default, see what happens if you default on a merchant cash advance.
What the Funder Alleges and the Records to Gather
Match the funder’s allegation to the records that answer it.
| Funder’s allegation | Records your attorney should review |
|---|---|
| You blocked or stopped ACH debits | Bank statements, stop-payment records, messages explaining why |
| You changed bank accounts or processors | Account and processor records, any notice you gave the funder |
| You took another MCA (“stacking”) | Every MCA agreement with dates, and the anti-stacking clause |
| You stopped paying after sales dropped | Sales records, reconciliation requests and responses, debit history |
| You owe the full balance plus fees | Funding disbursement, payment history, the agreement’s fee terms |
| The owner is personally liable | The guarantee, and which obligations it covers |
| Judgment was entered by confession | The confession affidavit, county stated, residence when signed and when filed |
Not Every Missed MCA Payment Is a Breach
Many MCA agreements set a fixed daily or weekly withdrawal that is meant to approximate an agreed percentage of sales, with a reconciliation clause to adjust it. Declining sales don’t automatically stop withdrawals or excuse every obligation in the agreement. What matters is how reconciliation works under your contract and whether its requirements were followed.
It helps to know which situation you’re in:
- The agreement lets you request reconciliation, and you submitted a proper request with the records it requires.
- The agreement requires the funder to reconcile on its own schedule.
- The agreement has no meaningful reconciliation, or reconciliation never happened in practice.
Courts look at how reconciliation worked in practice, not just what the contract says. In People v. Richmond Capital Group (1st Dep’t 2026), the court found the agreements provided for reconciliation but none was performed in practice.
Many agreements also say that a slowdown or closure caused by ordinary business problems is not a default. Whether that protects you depends on the wording and the facts.
Defenses to an MCA Breach of Contract Lawsuit
Which defenses apply depends on the agreement and the facts. The business raises these and has to prove them. These come up most often.
The MCA is really a loan, and the rate is criminally usurious. This defense has two steps. First, the transaction must legally be a loan. New York courts look at whether there is a real reconciliation provision, whether the agreement has a finite term, and whether the funder has recourse if the merchant files bankruptcy (LG Funding v. United Senior Props. of Olathe, 181 A.D.3d 664 (2d Dep’t 2020)). Second, if it is a loan, the effective rate must exceed New York’s 25% criminal usury limit. A criminally usurious loan is void, and a corporation can raise that defense (Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021)).
A high calculated rate doesn’t automatically void an MCA. In True Business Funding v. Guerrero A Construction (2d Dep’t 2025), the court ruled for the funder. The agreement had a reconciliation clause, no fixed term and treated bankruptcy as an excuse, so it was a purchase of receivables, not a loan. Exemptions also matter. New York’s interest-rate limits, including the criminal limit, don’t apply to loans of $2.5 million or more (GOL § 5-501(6)). The agreement, how it was performed, and applicable law determine whether the defense is available.
No defined default occurred. If your sales fell and the agreement says that isn’t a default, the funder may not be able to accelerate the balance.
The funder didn’t honor reconciliation. If you submitted a request the agreement allows, or the funder was required to reconcile and didn’t, that can matter. Keep every request and the funder’s responses.
The damages are overstated. Default fees, legal fees and other charges can be challenged, especially if they work as a penalty rather than a fair estimate of the funder’s loss.
Procedural problems. These include improper service or a case filed in a court that lacks jurisdiction over you.
Problems with a confession of judgment. A funder doesn’t need a confession of judgment to sue for breach. If it got a judgment by filing one, check where it was filed. Under New York’s CPLR 3218, it may be filed only in the county the affidavit states as the defendant’s residence when signed, or where the defendant resides when it is filed. A business entity resides where it has a place of business; an individual guarantor’s residence is analyzed separately. See our confession of judgment guide.
Personal Guarantees and Breach Claims Against Owners
MCA lawsuits often name the owner as well as the business, based on a personal guarantee. Read the guarantee carefully. Some guarantees cover specified performance obligations, such as not moving accounts or selling the business. Others are broader and guarantee payment.
If the guarantee covers only specific obligations, and the business slowed down or closed for ordinary reasons without breaching them, the owner may have a defense. If the agreement is void as a usurious loan, the guarantee may fall with it. For more, see Can a Merchant Cash Advance Put Your Personal Assets at Risk?
What the Funder Will Claim as Damages
A typical MCA complaint asks for:
- The unpaid balance of the purchased amount
- Default fees, NSF or returned-payment fees
- Attorney’s fees, often a fixed percentage of the balance
- Interest and court costs
What a funder can actually recover depends on the agreement and the facts. Check the math line by line. Compare the funder’s payment history with your bank statements. Look for debits that weren’t credited, and for fees that may work as a penalty rather than a fair estimate of the funder’s loss.
What to Do If You’ve Been Sued for Breach of an MCA Contract
- Find your deadline. In New York state court, the time to respond is often 20 or 30 days, depending on how you were served. Missing it can lead to a default judgment.
- Don’t ignore it or try to handle it with the funder alone. Calls with a collector don’t stop the court deadline.
- Gather your documents. These include the agreement, guarantee, every bank statement showing debits, reconciliation requests and any emails with the funder.
- Get legal review before redirecting receivables, changing the account the funder debits, transferring business assets or signing a new MCA. Those steps can create new defaults or other problems.
- Get a free MCA review. An attorney can check whether the funder can prove its case and what leverage you have to settle or defend. See how a merchant cash advance lawsuit moves from filing to resolution.
Sued for breach of an MCA contract? Free MCA review or case evaluation. Call 888.407.7460. Business Debt Law Group is a law firm, not a debt relief company.
MCA Breach of Contract FAQs
Is missing an MCA payment a breach of contract?
Not always, but a drop in sales doesn’t automatically excuse payments either. It depends on the agreement’s wording, how reconciliation works under it, and what actually happened.
Can an MCA funder sue me personally?
If you signed a personal guarantee, the funder may name you. Whether you’re actually liable depends on what the guarantee covers and whether a guaranteed default occurred.
Can I be sued in New York if my business is in another state?
Many MCA agreements choose New York law and New York courts. Whether that holds up, and whether a New York confession of judgment can be used against you, depends on the agreement and your facts.
Can an MCA breach of contract lawsuit be settled?
Settlement may be possible. It depends on the evidence, each side’s position and the proposed terms, including what any release covers.
Is the case review free?
Yes. The MCA review or case evaluation is free, and you don’t need a lawsuit to request one.
This article provides general information, not legal advice. Options depend on the documents, applicable law and individual circumstances. No particular result is promised, and submitting an inquiry does not create an attorney-client relationship.