Protect Your Merchant Cash Advance Funding from Usury Claims in NYC

Usury and How It Relates to Merchant Cash Advance Funding

In the fast-paced world of merchant cash advance (MCA) funding, where businesses snag quick capital based on future sales, funders face a lurking threat: usury claims. Picture this: you’ve advanced $50,000 to a merchant, expecting a percentage of their receivables in return, only to find yourself in a New York courtroom defending against accusations that your agreement is an illegal loan charging excessive interest.

This scenario isn’t hypothetical—it’s the reality unfolding in courts across the country. For MCA funders, understanding usury and crafting ironclad contracts isn’t just smart—it’s survival. Let’s dive into why usury matters, how it threatens your investment, and how a merchant cash advance attorney can help your business with savvy contract drafting.

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What Is Usury, Anyway?

Usury is the illegal practice of charging excessive interest on a loan, and in New York, it’s not just a civil slap on the wrist—it’s a crime. Under New York Penal Law § 190.40, anyone who “knowingly charges, takes or receives” interest exceeding 25% per annum commits criminal usury in the second degree, a class E felony. For MCA funders, the stakes are high: if a court deems your agreement a loan rather than a purchase of future receivables, you could lose your advance, face penalties, or worse. Merchants often wield usury as a defense when they default, claiming the MCA’s terms are predatory. But here’s the good news: courts frequently uphold MCAs as legitimate purchases—if they’re structured right.

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Loan or Purchase? The Legal Line in the Sand

So, how do courts decide if your MCA is a loan subject to usury laws or a bona fide purchase? The three-factor test New York courts use:

1. Reconciliation Provision: Does your agreement let the merchant adjust payments based on actual sales? Best case scenario, your contract mandates reconciliation, allowing adjustments to reflect the merchant’s real receipts—not a fixed sum. This flexibility screams “purchase,” not “loan.”
2. Indefinite Term: Is there a set repayment deadline? Model agreements have “no time period during which the Purchase Amount must be collected.” No fixed term? No loan.
3. Bankruptcy Recourse: Does bankruptcy trigger a default? Model contracts limit the funder’s recourse if the merchant goes bust, specifically as it pertains to bankruptcy. This type of limited recourse reinforces the purchase argument.

In Samson MCA LLC v. Joseph A. Russo M.D. P.C. (2023), the Fourth Department tossed a usury defense because the MCA checked these boxes. Principis Capital, LLC v. I Do, Inc. (2022) followed suit. The lesson? Nail these factors, and courts are likely to dismiss usury claims.

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Fortifying Your MCA Against Usury Attacks

Here’s how to bulletproof your MCA agreements:

• Mandate Reconciliation: Include a clause, requiring payment adjustments based on actual receipts. It proves payments hinge on sales, not a fixed debt.
• Ditch Fixed Terms: State explicitly there’s no repayment deadline. The “no time period” language is gold—copy it.
• Limit Bankruptcy Recourse: Don’t make bankruptcy a default event. It shows you’re not guaranteed repayment, a hallmark of a purchase.
• Add Clear Disclaimers: Revise your contract to scream, “THIS AGREEMENT IS NOT A LOAN.” Make it loud and clear.
• Document Everything: Treasure the remittance history and text exchanges. This will assist in crushing the merchant’s fraud and capacity defenses. Keep meticulous records.

Compliance with New York law is non-negotiable—disclose terms upfront and avoid interest-like fees that could tip the scales toward usury.

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The Payoff: Enforceable Agreements

A rock-solid MCA contract doesn’t just dodge usury—it wins in court. Work with an MCA attorney who knows New York’s ropes, and you’ll recover with force, not flounder in legal quicksand. In this game, good drafting isn’t optional—it’s your lifeline.

Don’t wait for a usury claim to disrupt your funding operations. At David I. Mizrahi Law P.C., we help MCA funders structure agreements that stand up in court and aggressively defend against legal challenges.

Contact us today to safeguard your business and ensure your contracts are enforceable under New York law.

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Frequently Asked Questions

What is usury in the context of merchant cash advances?

Usury refers to charging interest above the legal limit, which in New York is 25% annually. If an MCA is viewed as a loan rather than a purchase of receivables, it could trigger a usury claim.

Can a merchant cash advance be considered a loan in New York?

Yes, if an MCA lacks proper structuring, like no reconciliation clause or a fixed repayment term, it may be reclassified as a loan. This reclassification can expose funders to usury allegations.

How can I protect my MCA agreement from being labeled usurious?

Include key elements like reconciliation provisions, an indefinite term, and limited recourse in the contract. These demonstrate that the MCA is a purchase, not a loan.

What happens if a merchant claims my MCA is a usurious loan?

They may try to void the agreement and avoid repayment. However, courts often uphold MCA contracts if they follow the proper legal structure.

Why is a reconciliation clause important in an MCA contract?

It allows payments to adjust based on the merchant's revenue, showing that repayment isn’t fixed. This supports the argument that the transaction is a receivables purchase, not a loan.

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