A merchant cash advance is not a loan when the funder truly buys future receivables and bears the risk that they never arrive. Courts treat it as a loan when repayment is absolute in practice. New York courts weigh three factors: a working reconciliation provision, an indefinite term and no recourse if the merchant goes bankrupt.
Is a merchant cash advance a loan or a sale of future receivables?
A merchant cash advance is a loan, in the eyes of a court, when the merchant's duty to repay is absolute. It is a sale when the funder's recovery depends on the merchant's actual receipts, so the funder loses if sales dry up. The contract's label does not decide the question. The substance of the deal does.
The September 2023 decision in People v. Richmond Capital Group, New York Supreme Court, New York County, sets out the approach New York courts use. A transaction "must be looked at in its totality and judged by its real character, rather than by the name or form which the parties give it." And a transaction is not a loan "unless the obligation to repay the principal sum is absolute," which the court tied to whether the risk of ownership had passed to the funder.
The question matters because usury law applies to loans. If an advance is a true sale of receivables, the gap between the price paid and the amount collected is not interest, and usury limits do not apply. If the advance is a loan, the same gap is interest, and a factor rate that looks modest can work out to an annual rate far above the legal cap.
Funders write their agreements as sales for that reason. Courts look past the wording to how the agreement allocates risk and how the funder actually behaves. Two contracts with identical text can come out differently if one funder honors the sale terms and the other ignores them.
The three court tests for a merchant cash advance true sale
The three court tests for a merchant cash advance true sale ask whether the agreement has a reconciliation provision, whether it has a finite term, and whether the funder has recourse if the merchant declares bankruptcy. A deal that adjusts payments to actual sales, runs until the receivables arrive and leaves the funder unpaid in bankruptcy looks like a sale.
The Richmond Capital court took these factors from the Appellate Division's 2020 decision in LG Funding, LLC v United Senior Properties of Olathe, LLC. Each one asks a version of the same question: who bears the risk that the business earns less than expected?
Reconciliation. A reconciliation clause lets the merchant ask for payments to be adjusted to match the agreed percentage of actual receipts. If daily sales fall by half, the payment should fall too. A clause that exists on paper but that the funder never honors does not help. The Richmond court treated a mandatory reconciliation that "never occurred" as a sham.
Finite term. A sale of receivables has no fixed end date. The funder collects until the purchased amount arrives, however long that takes. A fixed schedule, such as a set payment every business day for 120 days, makes the deal look like a loan with a maturity date.
Recourse on bankruptcy. In a true sale, if the business fails in the ordinary course, the funder takes the loss. If the contract or a guaranty lets the funder collect the full amount from the merchant or the owner anyway, the risk never passed. Courts look at default events and guaranties together, because a guaranty of performance is different from a guaranty of payment.
The table below sorts common features by the direction each points. It is a reading aid built for this post, not a legal checklist, and courts weigh the whole deal.
| Feature (example) | Points toward | Test it touches |
|---|---|---|
| Payments adjusted monthly to the agreed share of actual deposits | Sale | Reconciliation |
| Reconciliation clause the funder refuses or never processes | Loan | Reconciliation |
| Collection continues until the purchased amount is received, with no end date | Sale | Finite term |
| Fixed daily debit over a set number of days, priced by time outstanding | Loan | Finite term |
| Business closing in the ordinary course is not a default | Sale | Bankruptcy recourse |
| Owner guaranty of payment, or default on a few missed debits | Loan | Bankruptcy recourse |
| Merchant asked to represent that receivables are free of liens the funder knows exist | Loan | Bankruptcy recourse |
How the Richmond Capital decision applied the merchant cash advance tests
The Richmond Capital decision applied the three merchant cash advance tests to a group of funders sued by the New York Attorney General and found that all three pointed to loans. The agreements had sale language, a mandatory reconciliation clause and a statement that bankruptcy alone was not a default. None of it reflected the real deal.
The facts the court relied on show how the tests work on a record:
- Reconciliation never happened. The agreements required merchants to send bank statements so payments could be reconciled with actual receipts. The court found the funders received the statements, knew what the merchants collected and never made adjustments. Witnesses either conceded that reconciliation did not occur or declined to testify.
- The term was fixed in practice. Text messages between the principals showed they priced and discussed deals by how long their money would be out. The court called them "fixed constant repayments over a fixed term."
- Recourse survived bankruptcy. The agreements required merchants to represent that their receivables were free of other liens, which the funders knew was false. That put merchants in breach from day one. An addendum made a few returned debits a default, and the funders enforced personal guaranties.
The court concluded: "the MCA were loans, not sales." It then held them usurious under New York law.
Two lessons stand out. First, the funders' own bank statement requests were evidence against them. They had the data needed to reconcile and did not use it. Second, contract clauses were judged by what the funder did with them.
Funders that monitor merchants after funding hold the same data. The guide to post-funding cash flow monitoring covers reading later statements, which is also the raw material for an honest reconciliation.
What does recharacterization as a loan mean for an MCA funder?
Recharacterization as a loan means usury law applies to the advance. In New York, the Richmond Capital court described civil usury as a loan above 16 percent a year and criminal usury as above 25 percent a year, and said a criminally usurious contract is void. A funder can lose the right to collect.
The consequences in that case went well past the contracts. The court ordered the funders to stop collecting, rescinded the agreements and guaranties, required them to seek vacatur of their confessions of judgment, terminate their liens, and refund what they took minus the principal they actually funded. The court also ordered them to disgorge their profits.
Settlements show the scale. In January 2025, the New York Attorney General announced a $1.065 billion judgment in its settlement with Yellowstone Capital, more than 534 million dollars of it paid by canceling merchants' outstanding debts. The Attorney General said the funders collected fixed daily amounts and that their advances functioned as short-term loans, with rates of up to 820 percent a year. Those are the office's statements in announcing a settlement, not findings by a court.
Recharacterization reaches other areas too:
- Guaranties. In Richmond Capital, the guaranties were rescinded along with the merchant agreements.
- Other lending law. A product that is a loan may bring in state licensing and disclosure rules aimed at lenders.
- Owner signatures. If the deal is credit, rules about whose signature a creditor may require come into play, including the ECOA spousal signature rule.
Funders also hold sensitive merchant data, often including bank logins. Whatever the product's label, a breach triggers the duties covered in data breach notification for lenders.
Does federal law treat a merchant cash advance as credit?
Federal law has not settled whether a merchant cash advance is credit. The CFPB's 2026 small business lending rule excludes MCAs from data reporting and says there is "a dearth of case law" on whether they meet the Equal Credit Opportunity Act's definition of credit. The question has been fought mostly under state law.
The CFPB's 2026 final rule revising the small business lending rule defines an MCA as an agreement under which a small business receives a lump sum in exchange for a share of its future sales or income up to a ceiling amount. It says the 2023 rule erred by "concluding that all MCAs constitute credit," because MCA terms vary across the market.
The CFPB did not decide the reverse either. It wrote that it does not agree that all MCAs must be excluded on the ground that none are credit, or covered on the ground that all are. It will keep monitoring the market to see whether a subset should be included later.
For funders, this means the federal reporting duty is gone for now, but the label question is not. A state court applying usury law, or a regulator applying state lending law, will still look at reconciliation, term and recourse. The section 1071 small business lending rule guide covers what the federal rule still requires of lenders that also make term loans.
Merchant cash advance terms that push a court toward a loan finding
The merchant cash advance terms that push a court toward a loan finding are the ones that move risk back to the merchant: fixed payments, short fixed terms, defaults on missed debits and guaranties of payment. Collection habits matter as much as wording, as the Richmond Capital record shows.
Habits that undo a sale structure:
- Ignoring reconciliation requests, or making the process so hard that merchants never qualify.
- Pricing by days outstanding and talking about deals as loans in internal messages.
- Calling defaults on a few returned debits when the contract says slower sales are not a breach.
- Requiring false representations, such as no other liens when the funder knows of a prior position.
- Marketing as a lender. The Richmond court noted that the funders advertised themselves as lenders.
The safer pattern is the reverse. Reconcile on request, on time, from the merchant's actual deposits. Keep a record of each adjustment. Let collection run longer when sales drop. Treat a business that fails in the ordinary course as a loss, not a default.
Reconciliation needs a clean read of deposits each month. TrueBankFlow builds monthly deposit totals from merchant statements, with each total linked to its statement lines, so the funder can check a reconciliation figure against the deposits behind it.