When Is a Merchant Cash Advance Really a Loan? Bankruptcy Implications for Business Owners and MCA Funders
Merchant cash advances (“MCAs” or singularly an “MCA”) have become an increasingly popular financing option for small and mid-sized businesses that may not qualify for traditional bank loans. The size of the MCA market has reportedly reached $19.65 billion in 2025 and is projected to grow to $26.87 billion by 2030.[1] MCAs have come under mounting scrutiny[2] and challenge, however, particularly when an MCA recipient files for bankruptcy. In that arena, critical questions about the true nature of the MCA obligation –– and whether what was nominally structured as a "sale of future receivables" is really a disguised loan — come under sharper focus.[3] This distinction carries profound implications for both merchants and MCA funders.
Basic Structure and Operation
Under a typical MCA agreement, a funding company provides a merchant with upfront capital in exchange for purchasing a specified amount of the merchant's future credit card receipts or accounts receivable at a discounted price.[4] The merchant agrees to remit payments to the funder, usually through daily or weekly automated clearing house (ACH) debits from the merchant's designated bank account[5] that are typically calculated as a percentage of the merchant’s estimated monthly cash receipts (adjusted to comport with the time interval for the debits). For example, a funder might advance $90,000 to purchase $140,000 of the merchant's future receipts, with the merchant obligated to authorize daily debits of $4,000 from its bank account.[6] The difference between the amount advanced and the total amount to be repaid represents the funder's profit, which can result in effective annual interest rates exceeding 300% in some cases.[7]
The Legal Framework for Recharacterization
Despite contract language stating otherwise, courts will look to the substance, not merely the form, of an MCA agreement to determine whether it constitutes a loan subject to lending laws.[8] Agreements styled as "merchant cash advances" or "receivables purchases" may actually be loans if they impose an absolute obligation to repay and shift virtually all risk to the borrower.
In a true sale of future receivables, the buyer (the MCA funder) bears the risk that the purchased asset will be uncollectible.[9] When determining whether the right to repayment is absolute, courts weigh three primary factors: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy.[10]
Courts have held that if the MCA provider is "absolutely entitled to repayment under all circumstances," then the risk remains with the merchant, and the transaction is properly characterized as a loan.[11]Additional factors may include whether default provisions entitle the funder to immediate repayment, whether the agreement allows collection on a personal guaranty in the event of default or bankruptcy, and whether the agreement requires the granting of a security interest in the merchant’s assets.[12]
Key Indicators of a Disguised Loan
Recent court decisions have identified several structural features suggesting that an MCA is, in substance, a loan:
Illusory Reconciliation Provisions. While legitimate MCAs contain meaningful reconciliation clauses allowing payment adjustments based on actual revenues, as opposed to what was estimated at the outset, courts have found that when reconciliation provisions do not bind the funder to pay back any money collected that exceeds the specified percentage of the merchant's revenues, this factor weighs in favor of classifying the agreement as a loan.[13] An additional consideration suggesting an MCA agreement is a disguised loan is where a merchant may not obtain a reconciliation when it is in “default,” such as when it has not made daily or weekly payments as required or has violated any of the multiple covenants that are typically contained in a MCA agreement, such as a solvency covenant.[14]
De Facto Fixed Terms. Although MCA agreements often lack stated maturity dates, courts have found that where a de facto fixed term plausibly exists—easily calculated by dividing the amount owed by the daily payment amount—this factor supports loan classification.[15]
Personal Guarantees and Collateral. The existence of a personal guarantee of payment to the MCA provider and the grant of a security interest in the merchant’s assets have been found to be indicators of a loan, as opposed to a sale of receivables. [16]
Lack of Identification of Receivables Purchased. Common features of an MCA agreement are its failure to identify which of the merchant’s receivables the MCA provider is purchasing, along with the absence of any restrictions on the merchant’s use of all the proceeds of its receivables as long as the daily, weekly or monthly payment to MCA provider is made. These features have held to be “a significant indicator of a loan.”[17]
Liability Exposure for MCA Funders
In the following decisions, the bankruptcy courts have relied on one or more of the above key indicators in determining that the MCA obligation under review was in substance a loan and not a true sale of future receivables.
Fraudulent Transfer Claims
When an MCA is recharacterized as a usurious loan, payments made to the funder may be avoidable as constructively fraudulent transfers under 11 U.S.C. § 548(a)(1)(B). In In re Anadrill Directional Services Inc.[18], the bankruptcy court permitted the trustee's fraudulent transfer claims to proceed, reasoning that if the MCA agreement was a criminally usurious loan it would be void under New York law and thereby result in a lack of reasonably equivalent value to the debtor in exchange for its payments.[19]The court noted that a contract that is void has no legal effect and creates no enforceable rights or obligations.[20]
Avoidable Preferences
MCA payments may also be recovered by a debtor-in-possession or a trustee as preferential transfers under 11 U.S.C. § 547. In In re J.P.R. Mechanical Inc.[21], the court granted the trustee's motion for summary judgment to avoid payments made under MCA agreements as preferences. The court found that where the parties' agreements and conduct established that MCA obligations constituted debts as a matter of law, payments made on those obligations within 90 days of bankruptcy, while the debtor was insolvent, were avoidable.[22]
In addition to finding the transaction to constitute a loan using several of the indicators cited above,[23] the court found that the MCA funder's own proofs of claim identifying itself as a "creditor" holding a "claim" for money owed, effectively admitted the existence of a debt relationship, precluding the funder from denying creditor status.[24] The "ordinary course of business" defense also failed because payments vastly exceeding the routine daily payment amounts required under the agreement were not ordinary and the defendant could not satisfy its burden of showing that the payments were made according to “ordinary business terms.”[25]
Implications for Plan Confirmation
When an MCA is recharacterized as a loan in bankruptcy, the consequences for plan confirmation can be significant. In In re Butler Trucking LLC,[26] the debtor's Chapter 11 plan treated MCA creditors as having debt obligations that were entirely unsecured claims based on liens that were senior to them in priority, and no objections were filed[27]. The court noted that where senior secured lenders hold priority liens exceeding the value of all collateral, a recharacterized MCA claim would properly be treated as wholly unsecured.[28]
Because future receivables generated after the bankruptcy filing do not yet exist at the time of their purported pre-petition sale, they cannot be sold under the longstanding rule that no one can transfer what does not yet exist. As a result, any receivables that come into existence only after the bankruptcy filing become property of the bankruptcy estate, not the MCA lender. [29] As the court in In re IVF Orlando, Inc. explained, "one cannot sell more than one owns, and when the MCAs were executed prepetition, the Debtor had no future receivables to convey, only a hope they may come to exist.”[30]
This principle is reinforced by 11 U.S.C. § 552(a), which provides that "property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case." Accordingly, even if an MCA were treated as creating a security interest rather than an ownership interest, that security interest would not attach to post-petition receivables.
Another interesting point made by the bankruptcy court in Butler Trucking was that the debtor’s plan provided for the rejection of all executory contracts, of which the MCA agreement providing for the future sale of receivables was arguably one, and as such, its rejection would result in providing the MCA lender with a mere prepetition unsecured claim by virtue of 11 U.S.C. §§ 365(g)(1) and 502(g).[31]
Practical Insights for Merchants
For business owners who have entered into MCA agreements and are facing financial distress, it is critical to examine the agreement's actual terms and the parties' conduct. If the agreement operates as a loan in substance, particularly one carrying an interest rate exceeding state usury limits, bankruptcy may provide opportunities to discharge or restructure the obligation and potentially recover payments already made.
Conclusion
The determination of whether an MCA is a true sale or a disguised loan has far-reaching consequences in bankruptcy. For merchants, recharacterization may offer relief from oppressive obligations; for funders, it may expose claims to avoidance actions and relegation to unsecured status. As bankruptcy courts continue to develop this area of law, both parties should structure and document MCA transactions with these risks in mind and seek experienced counsel when distress emerges.
Irve J. Goldman is the Chair of the Bankruptcy and Creditors Rights Practice at Pullman & Comley, LLC, and has been certified as a business bankruptcy specialist by the American Board of Certification since 1993. He can be reached at igoldman@pullcom.com.
***********************************************************************************************************
[1] Merchant Cash Advance Global Market Report 2026 (Feb. 2026), https://www.thebusinessresearchcompany.com/report/merchant-cash-advance-global-market-report (last visited Feb. 16, 2026).
[2] For example, effective July 1, 2024, Connecticut has imposed strict disclosure and other requirements on certain providers of “commercial financing,”, C.G.S. § 36a-861 et. seq., defined as “any extension of sales-based financing by a provider in an amount not exceeding two hundred fifty thousand dollars, the proceeds of which the recipient does not intend to use primarily for personal, family or household purposes.” C.G.S. § 36a-861(1).
[3] Based on anecdotal evidence, MCA agreements typically contain a choice of law provision for the application of New York law, and the decisions which are referenced in this article all appear to have applied New York law.
[4] See AFK, Inn. v. Haven Transportation Business Solutions, Inc., 2024 WL 2941746, at *8 (N.D.N.Y. June 11, 2024) (funder advanced $154,663 to receive back $219,368 in future receivables, generating a discount of $64,705).
[5] See In re Steele, 2019 WL 3756368, at *2 (Bankr. E.D.N.C. Aug. 8, 2019).
[6] Crystal Springs Capital, Inc. v. Big Thicket Coin, LLC, 220 A.D.3d 745, 745-747 (2023).
[7] See e.g. Lateral Recovery, LLC v. Capital Merchant Services, LLC, 632 F.Supp.3d 402, 422 (S.D.N.Y.2022).
[8] AFK, Inn. v. Haven Transportation Business Solutions, Inc., 2024 WL 2941746, at *5 (N.D.N.Y. June 11, 2024).
[9] Id. at *6.
[10] In re J.P.R. Mechanical, Inc., 2025 WL 1550541, at *7 (Bankr. S.D.N.Y. May 30, 2025). See also In re IVF Orlando, Inc., 2025 WL 2831400, at *10 (Bankr. M.D. Fla. Oct. 3, 2025).
[11] In re McKenzie Contracting, LLC, 2024 WL 3508375, at * 2 (Bnakr. M.D. Fla. July 19, 2024).
[12] See Fed. Trade Comm’n v. RCG Advances LLC, 2023 WL 6206145, at *46 (S.D.N.Y. Sept. 27, 2023); In re Anadrill Directional Services Inc., 2026 WL 234908, at *5 (Bankr. S.D. Tex. Jan. 28, 2026).
[13] J.P.R. Mechanical, Inc., at *7.
[14] AFK, Inn. v. Haven Transportation Business Solutions, Inc., 2024 WL 2941746, at *6 (N.D.N.Y. June 11, 2024); In re IVF Orlando, Inc., 2025 WL 2831400, at *13 (Bankr. M.D. Fla. Oct. 3, 2025).
[15] AFK, Inc., at *7; J.P.R. Mechanical, Inc., at *8.
[16] See supra. n. 12 and accompanying text.
[17] J.P.R. Mechanical, Inc., at *9 (citing Fleetwood Services, LLC v. Ram Cap Funding, LLC, 2022 WL 1997207, at *11 (S.D.N.Y. June 6, 2022)).
[18] In re Anadrill Directional Services Inc., 2026 WL 234908 (Bankr. S.D. Tex. Jan. 28, 2026).
[19] In re Anadrill Directional Services Inc., 2026 WL 234908, at *7 (Bankr. S.D. Tex. Jan. 28, 2026).
[20] Id. As an additional ground for avoidance as a constructive fraudulent transfer, the bankruptcy court found that the merchant’s obligation to pay $1,016,000 while only having received funding in the amount of $650,000 resulted in a lack of reasonably equivalent value. Id. at *7.
[21] In re J.P.R. Mechanical Inc, 2025 WL 1550541 (Bankr. S.D.N.Y. May 30, 2025).
[22] Id. at *1.
[23] Id. at *7-9. An additional fact the bankruptcy court considered was that the filing of a bankruptcy itself, although expressly disavowed in the agreement as an event of default, could result in a default of another provision of the agreement requiring the merchant not to “interfere with [the merchant funder’s] right to collect.” Id. at *8. Such a default would then have triggered debt acceleration and an ability to collect against the guarantor.
[24] Id. at 9.
[25] Id. at 12.
[26] In re Butler Trucking LLC, 2025 WL 1934205 (Bankr. N.D. Ohio July 14, 2025).
[27] Id. at *8, 10 n. 6. At the time of confirmation, however, there was a pending adversary proceeding filed by the debtor which sought to recharacterize the denominated “sale” of receivables as debt and to treat the debt as wholly unsecured based on prior liens which consumed all of the debtor’s asset value. The bankruptcy court had made clear that such plan treatment was contingent upon its resolution of the adversary proceeding in the debtor’s favor. Id. at *10 n. 6.
[28] Id. at *8.
[29] Id. at *8-9.
[30] In re IVF Orlando, Inc., 2025 WL 2831400, at *7 (Bankr. M.D. Fla. Oct. 3, 2025).
[31] Butler Trucking, at *10-11. The two Bankruptcy Code sections cited provide that the result of a rejection of an executory contract is to provide the non-debtor party to the contract with a unsecured prepetition breach of contract claim.