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When are Merchant Cash Advances Loans? When Do They Cross the Line?

Business Debt Law Group > Merchant Cash Advance  > When are Merchant Cash Advances Loans? When Do They Cross the Line?

When are Merchant Cash Advances Loans? When Do They Cross the Line?

A row of toppled dominoes lays next to a row of standing dominoes. Merchant cash advance debt can have a domino effect on many businesses.

If you are a business owner struggling under debts from a merchant cash advance, you may be asking yourself how the advance you received can be legal. You may be wondering what you can do to get free of your debt and return to operating your business as usual.

You may also be asking yourself some variation of the following questions:

  • When may a merchant cash advance be considered by a court of law or a governmental regulatory agency to be a “loan”, as opposed to a “purchase of future receivables”?
  • Under what circumstances does a merchant cash advance lose its unregulated status as a purchase of future receivables and, instead, expose itself as an illegal and usurious loan?

In this article we will look at key factors that differentiate Merchant Cash Advances from traditional loans and investigate when an advance may actually cross the line and should be considered a loan.

Look at the Language of Your Advance Agreement. Is the Repayment Plan Conditional or Unconditional?

One of the first things to consider if you think that your MCA agreement is, in fact, crossing the line is that in a merchant cash advance transaction, payments to the lender are linked to, and contingent upon the merchant’s business revenue. Whereas, in a loan, there is an unconditional right to repayment regardless of the state of the recipient’s business or financial affairs.

This means that in a true advance, your business must have revenue in order for the advance broker to expect payment. In other words, repayments on the advance are conditional upon whether your business is actually making money.

To make certain the repayments are, or look, conditional, the MCA lenders must make certain that the merchant borrower does not unconditionally agree to repay the advances.

But the language surrounding the repayment plan is not the only item to look out for in an MCA agreement or contract. There are several other areas where a broker may be misrepresenting a loan as an advance.

It is important to state here that if you have already taken out a merchant cash advance, you and a merchant cash advance attorney should review the agreement to ensure that it is actually an advance and not a loan. If you have not taken out an advance yet, you should know that there are many superior options available to you.

Key Factors to Consider in MCA Contracts

A business owner carefully inspects her merchant cash advance agreement to make sure it is not really a loan.

The Key Factors for Consideration when you look closely at your advance agreement are the following:

  1. How does the lender/purchaser behave? What sort of language do they use?
  2. Does the agreement mention unconditional repayment or conditional repayment of the advance?
  3. Does the agreement allow for reconciliation or re-adjustment opportunities?
  4. Does the agreement contain a prohibition on bankruptcy or default?
  5. Did the lender require a personal guarantee?

Below are the terms of an agreement that courts acknowledge as evidence of a purchase and sale of receivables rather than a loan. If your lender has not followed these guidelines, then a court may recognize that your merchant cash advance may have crossed the line into the territory of an illegal loan.

The Repayment Amount Must Be Conditioned and Adjustable Based Upon the Current Status of Your Business

The merchant is only selling their future receivables to the extent they are available.

So, if cash receivables decline due to adverse business conditions (loss of site, natural disasters, pandemic, or similar material adverse change), the merchant cash advance company suffers the loss.

As mentioned above, your business should only repay on a merchant cash advance when there is revenue coming through the business. The repayment is conditional upon your cashflow.

If the Contract States That a Bankruptcy Filing Results in a Default, Its Unlawful

Bankruptcy must not be considered a breach of contract or element of default within the merchant cash advance agreement.

No Personal Guarantees

The owner of the merchant business guarantees that the business will not breach any covenants in the merchant cash advance agreement, but the owner is not an unconditional guarantor of repayment.

If You Go Out of Business, You No Longer Need to Repay the Debt

The merchant’s obligation to deliver the future receivables is conditioned upon the continuance of the merchant’s business.

If There is Only a Fixed Time to Repay the Advance, It Acts Like a Loan

The merchant is not contractually obligated to repay the debt in any certain period of time and if revenues slow, the MCA contract states clearly that time for repayment can be extended.

How Can You Tell if Your Advance has Crossed the Line from an Advance to an Illegal Loan?

A business owner struggling with debt from a merchant cash advance goes over her bills to make sense of her accounting books.

The contractual key to MCA transactions that prevent them from being considered “loans” is that the merchant does not unconditionally agree to “repay” the advances.

The merchant is only selling its future receivables to the extent those receivables are generated by the business.

The merchant’s obligation to deliver the future receivables is expressly conditioned upon the continuance of the merchant’s business.

Due to the conditional nature of the repayment obligation, a true merchant cash advance transaction is not considered a loan and therefore, is not subject to the commercial usury laws and state licensing laws that apply to loans.

In order that MCA agreements contain that necessary “conditional repayment” designation to avoid being considered illegal loans, those contracts must contain something referred to as a Reconciliation or Re-Adjustment clause.

A reconciliation or re-adjustment clause essentially states that if your daily or weekly revenues decline, then you have the right, or the MCA lender may even have the obligation, to adjust your daily or weekly payment downward to be more accurately tied to your current revenues.

What Markers Should You Look Out For?

Here’s a brief summary of the items that a merchant cash advance attorney may look for on your merchant cash advance agreement to determine if it is a proper advance or a loan:

  1. Conditional or unconditional repayment terms.
  2. Reconciliation provisions.
  3. Language used by lender/purchaser. Did the purchaser say “loan” within the agreement?
  4. Bankruptcy prohibitions.
  5. Personal guarantees.

Does a Contractual Language Failing in an MCA Agreement Help a Debtor Merchant Avoid Repaying the Debt?


If the merchant cash advance agreement does not contain the proper legal language related to an unconditional obligation to repay, reconciliation mechanisms, or if it attempts to restrict a merchant’s ability to file Bankruptcy or requires a personal guarantee, it is quite possible that a court of law may find that the so called “purchase of future receivables,” is in fact, an illegal and usurious loan.

If a court rules as such, the loan is legally unenforceable, and the debtor merchant need not repay the debt.

At minimum, if the Merchant Cash agreement does not meet the minimum contractual language standards, your lawyer will have strong legal defenses to put forth on your behalf.

This of course, will greatly weaken the MCA company’s negotiating position, making a very favorable settlement much more likely.

Contact a Merchant Cash Advance Attorney Today to Examine Whether Your Advance has Crossed the Line

A merchant cash advance attorney reviews a client's advance agreement with the statue of justice in the foreground of the image.

Recent changes in the merchant cash advance Industry mean that state governments and courts (and even the federal government) are more aware than ever of the problems that merchant cash advances have caused for business owners.

On June 10, 2020, the Federal Trade Commission and the New York Office of the Attorney General filed actions against two merchant cash advance (MCA) companies known as RCG Advances and Ram Capital Funding.

Both the FTC and New York Attorney General brought forth several claims against these merchant cash advance companies concerning their marketing practices and the offering of their financial products.

Along with similar claims brought by the FTC, the New York Attorney General asserted that defendants “disguise each loan as a ‘Purchase and Sale of Future Receivables,’ but in reality, …the transactions are loans.”

The New York Attorney General pointed to a number of examples as to why the so-called cash advances are in fact, loans, including the marketing of advances as loans, using underwriting policies that consider a merchant debtor’s credit rating and bank balances, as opposed to only their receivables, and not reconciling or recharacterizing a debtor’s repayment of the advances, if that debtor’s business suffers a downturn in revenue.

If you’re concerned that your merchant cash advance is, in fact, an illegal loan, if you are facing a merchant cash advance lawsuit filed by your broker, or if you are having any other issues with your merchant cash advance, now is the right time to contact a merchant cash advance attorney.

The attorneys at Business Debt Law Group have decades of experience in helping clients get free of crushing debt. Contact us today for a free consultation to learn how we can help you.

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