6 Elements of the "True Loan" Defense in MCA Litigation

This is the first thing a court examines. And it's the one that trips up more MCA funders than any other.

Here's the concept: A real MCA (a genuine purchase of future receivables) should adjust your payments when your revenue drops. If you're making $50,000 a month and the funder is pulling $2,000 a day, but then your revenue drops to $30,000 — the daily payment should go down proportionally. That adjustment mechanism is called reconciliation (sometimes called a "true-up").

Most MCA agreements have a reconciliation clause. It's right there in the contract. But here's the problem — it's often completely unusable. The funder makes you jump through hoops to request one. You can only request it within a specific window. You need 30 days of documentation. And even if you follow every step perfectly, the funder can deny it at their sole discretion.

That's not reconciliation. That's a prop. And courts are catching on.

In Davis v. Richmond Capital Group, the New York First Department specifically flagged "the discretionary nature of the reconciliation provisions" and "allegations that defendants refused to permit reconciliation" as evidence that the MCA was functioning as a loan.

If your funder collected a fixed daily amount regardless of what your actual revenue was doing — that's loan behavior. Full stop.

This one is closely tied to reconciliation, but it's worth separating out because it's so common.

Your MCA agreement probably says something like: "Merchant agrees to remit 15% of daily receivables." Sounds like it fluctuates with your revenue, right? But look at the ACH authorization. It's a fixed dollar amount. $800 a day. $1,200 a day. $2,500 a day. Every single day, same number, regardless of whether you had a great week or a terrible one.

That conversion — from a percentage of receivables to a fixed daily dollar amount — is where the entire "purchase of future receivables" fiction starts to collapse. Because a fixed payment obligation is the defining characteristic of a loan. Not a sale.

Courts have specifically pointed to "daily payment rates that did not appear to represent a good faith estimate of receivables" as an indicator that the agreement is actually a loan. When the funder sets a daily ACH amount at origination and never adjusts it, they're not buying your receivables. They're lending you money and collecting a fixed repayment. The label on the contract doesn't change what the thing actually is.

Loans have terms. You borrow money, you pay it back by a certain date. MCAs are supposed to be open-ended — the funder bought your future receivables, and they collect until the purchased amount is satisfied, however long that takes. If business is slow, it takes longer. If business is good, it goes faster. There's no deadline.

That's the theory. Here's the reality.

Take the purchased amount (what you owe), divide it by the daily fixed payment, and you get a number of business days. That number is, functionally, a maturity date. And everyone involved knows it. The funder's underwriting model calculates it. The broker who sold you the deal quoted it. Your agreement might even reference an "estimated term" or "anticipated collection period."

If the court can calculate a de facto maturity date from the terms of your agreement — and if the funder's internal communications or marketing materials reference a specific repayment timeline — that's a finite term. And a finite term is a hallmark of a loan, not a purchase of receivables.

The LG Funding decision specifically identified "whether the agreement has a finite term" as the second prong of the test. An indefinite term (where the collection period genuinely depends on your actual revenue) points toward a real MCA. A calculable fixed term points toward a loan.

This is the one most business owners don't think about until it's too late.

Almost every MCA agreement includes a personal guarantee. You signed it when you took the advance. It says that if your business can't pay, you personally are on the hook. Your house. Your savings. Your personal bank accounts. Everything.

But think about what that means in the context of a "purchase of future receivables." The funder supposedly bought a piece of your business's future revenue. If the business fails, and there are no future receivables to collect — the funder should absorb that loss. That's the entire premise of why MCAs aren't loans. The funder is taking on the risk of your business performance.

A personal guarantee destroys that premise. It says: "We don't actually care if the business fails. We'll come after you personally." That's not a funder who bought receivables and accepted the risk. That's a lender who wants their money back no matter what.

Courts have recognized this. The personal guarantee is evidence that the funder did not assume the risk of non-performance — which means the transaction looks a lot more like a loan than a sale.

This is the core question underneath everything else. And it's the one that determines which side of the line your agreement falls on.

In a true purchase of future receivables, the buyer (the MCA funder) assumes the risk that the receivables might never materialize. If your business goes under, the funder loses. That's the deal. That's why they're allowed to charge a factor rate that would be criminal if applied to a loan — because theoretically, they might get nothing.

In a loan, the borrower bears that risk. You owe the money regardless.

So look at your agreement. What happens if your business fails? What happens if you file for bankruptcy? If the answer is "the funder can still collect through the personal guarantee, the confession of judgment, and the UCC lien" — then the funder didn't actually assume any risk at all. They structured the deal so they get paid no matter what.

The LG Funding test makes this the third prong: "whether there is any recourse should the merchant declare bankruptcy." If the agreement says bankruptcy is an event of default that triggers full acceleration and personal guarantee enforcement — the court has strong grounds to conclude that repayment is "absolute," not contingent on business performance. And absolute repayment is the legal definition of a loan.

Multiple provisions typically stack here. The confession of judgment (which lets the funder get a judgment against you without a trial), the UCC-1 lien on all your business assets, the personal guarantee, and the broad default triggers — taken together, they show a funder who has zero exposure to the risk they're supposedly taking on.

This is the element that's evolved most in recent case law. And it might be the most important one going forward.

Everything above looks at what the contract says. This element looks at what the funder actually did.

Did you request a reconciliation and get ignored? Did you provide documentation showing a revenue decline and the funder kept pulling the same fixed amount? Did the funder refuse to adjust payments and instead threaten you with acceleration, lawsuits, and frozen accounts?

That conduct matters. A lot.

The Davis v. Richmond Capital Group decision made this clear — even if the MCA agreement was validly structured as a purchase at the time it was signed, a subsequent refusal to honor reconciliation could evidence that the funder treated the agreement as a loan rather than a receivable purchase. In other words, the funder's behavior after signing can retroactively expose the true nature of the deal.

This is why documentation matters. Every email you sent requesting a payment adjustment. Every voicemail where the funder told you "no." Every month where your revenue dropped 40% and the ACH stayed exactly the same. All of it is evidence that the funder never intended this to be a real receivable purchase — they intended it to be a high-interest loan with a creative label.

No single element is usually enough on its own. Courts weigh all of them together to determine the "true character" of the transaction. But the more elements that point toward loan behavior, the stronger the defense becomes.

And here's what makes this defense so devastating when it works: In New York, criminal usury is a rate above 25% APR. Most MCAs, when you convert the factor rate to an APR based on the actual repayment period, come in at 100%, 200%, sometimes north of 500%. If the court reclassifies your MCA as a loan, those rates don't just exceed the usury cap — they obliterate it. And under New York law, a criminally usurious loan is void. Not voidable. Void. The funder can be barred from collecting the principal, the fees, everything.

That's not a negotiating chip. That's a nuclear option.

Not every MCA agreement is a loan in disguise. Some are properly structured, have meaningful reconciliation, and genuinely allocate risk to the funder. But a lot of them aren't. A lot of them are high-interest loans wearing a receivable-purchase costume. And if yours is one of those — you have a defense. A real one.