What a Merchant Cash Advance Is
A merchant cash advance provides a business with a lump sum in exchange for a percentage of future receivables, repaid through daily or weekly withdrawals from the business bank account. It is documented as a purchase of future revenue rather than a loan.
That characterisation matters enormously. If it is a sale of receivables it escapes usury limits and lending regulation. If it is in substance a loan, effective rates that can reach triple digits annually may be unlawful.
Effective rates are often far higher than they appear
Because repayment is taken daily over a short period, a factor rate that looks modest can equate to an annual percentage rate in the high double or triple digits. Converting to an annualised rate before signing is essential to understanding the cost.
True Sale or Disguised Loan
Courts assess substance over form. The key indicators are whether repayment is genuinely contingent on the business generating revenue, whether there is a fixed term, and whether the funder bears real risk of non-payment.
Where an agreement includes a personal guarantee, a fixed daily amount regardless of actual receipts, or reconciliation provisions that are illusory in practice, courts have been more willing to find a disguised loan subject to usury law.
Confessions of judgment allowed a funder to obtain a judgment without notice or hearing on the borrower simply signing in advance. Their use against out-of-state small businesses attracted significant enforcement, and several jurisdictions have restricted them.
What Business Owners Should Do
Keep the full agreement, all addenda, the personal guarantee if any, and complete records of every withdrawal taken. The pattern of actual withdrawals against actual receipts is what evidences whether reconciliation was real.
If a reconciliation provision exists allowing adjustment when revenue falls, use it in writing and keep the response. A funder refusing to reconcile despite a contractual right supports the argument that the arrangement was a loan in substance.
Read for a confession of judgment before signing
A confession of judgment allows a funder to obtain and enforce a judgment without you being heard. Where still permitted, signing one surrenders the ability to defend, regardless of any dispute about the amount owed.
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Merchant Cash Advance Lawsuits: Disguised Lending and Confession of Judgment: Frequently Asked Questions
Answers to the most common questions about this case and your legal options.
What is a merchant cash advance?
A lump sum provided to a business in exchange for a share of future receivables, repaid through daily or weekly withdrawals and documented as a purchase rather than a loan.
Why does the loan question matter?
If it is a true sale of receivables it escapes usury limits. If it is a disguised loan, effective rates reaching triple digits may be unlawful.
What indicates a disguised loan?
A fixed term, a personal guarantee, fixed daily amounts regardless of receipts, and reconciliation provisions that are illusory in practice.
What is a confession of judgment?
A document signed in advance allowing a funder to obtain a judgment without notice or hearing. Several jurisdictions have restricted their use.
What records should I keep?
The full agreement and addenda, any personal guarantee, and complete records of withdrawals against actual receipts, which evidence whether reconciliation was real.
Legal Disclaimer
This article is general legal information, not legal advice, and does not create an attorney-client relationship. Case status, eligibility criteria, and any amounts described are as reported at the date shown and may change. Consult a licensed attorney in your jurisdiction about your own situation.