Merchant cash advances (MCAs) have become a cornerstone of alternative finance, offering quick, nontraditional funding to small businesses that struggle to qualify for conventional loans. However, as the MCA industry expands, the legal frameworks governing enforcement, disclosure, and collection have grown increasingly complex. Recent court decisions, state-level regulations, and public scrutiny are reshaping how MCA funders pursue payment from defaulting merchants.
The rise in litigation surrounding merchant cash advance collections reflects a broader shift in how courts and regulators interpret the nature of these agreements. Once considered simple receivable purchase transactions, many MCAs now face legal challenges questioning whether they function as disguised loans. These disputes directly influence how attorneys handle enforcement, judgment recovery, and compliance under usury and consumer protection laws.
At David I. Mizrahi Law, P.C., we’ve seen firsthand how evolving rulings and regulations are reshaping MCA recovery and judgment enforcement strategies across the country.
An MCA is designed as a purchase of future receivables, not a loan. The funder provides an upfront lump sum to a merchant and collects a percentage of the merchant’s daily or weekly sales until the agreed amount is repaid.
The key legal distinction lies in the element of risk. For an MCA to remain a true sale and not be classified as a loan, repayment must depend on the merchant’s actual receivables. If the contract instead guarantees repayment regardless of performance, courts may recharacterize it as a loan subject to state usury and lending laws.
New York’s appellate decision in Champion Auto Sales, LLC v. Pearl Beta Funding, LLC, 159 A.D.3d 507 (N.Y. App. Div. 2018), reaffirmed the MCA structure as a legitimate sale when repayment was contingent on receivables. However, other cases—like LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 F. Supp. 3d 890 (S.D.N.Y. 2016)—show that excessive control or fixed remittance obligations can shift the transaction into lending territory.
As a result, funders and attorneys must pay close attention to contract language, ensuring that risk allocation, reconciliation rights, and default triggers are clearly and lawfully defined.
In response to industry growth, several states—including California, New York, New Jersey, Virginia, and Utah—have passed or proposed laws requiring enhanced transparency in small business financing.
For example, California’s SB 1235 and New York’s Commercial Financing Disclosure Law (CFDL) mandate detailed pre-funding disclosures, such as estimated annualized costs and repayment structures. These reforms, while beneficial for merchants, also increase funders’ exposure to compliance risk.
At the federal level, the Federal Trade Commission (FTC) has stepped up enforcement against misleading or overly aggressive collection tactics. In 2022, the FTC settled cases against MCA funders for alleged misrepresentations and unfair practices under Section 5 of the FTC Act.
For attorneys advising funders, compliance now demands collaboration across transactional, regulatory, and litigation disciplines to ensure every collection effort adheres to both contractual and statutory obligations.
When merchants default, a strategic, legally sound approach is critical. Skilled MCA attorneys typically begin with demand letters and negotiation, escalating to litigation only when necessary.
Once a judgment is obtained, enforcement may involve bank restraints, liens, or garnishments. However, courts are increasingly scrutinizing procedural compliance. Confession of judgment (COJ) clauses—once common for expedited enforcement—have faced growing restrictions. Since 2019, New York has prohibited out-of-state COJs for non–New York debtors, compelling funders to rely on traditional litigation or arbitration.
Our approach emphasizes precision and procedural integrity, ensuring service of process accuracy, affidavit sufficiency, and adherence to jurisdictional requirements to avoid reversals or delays in enforcement.
Securing a judgment is only half the battle. Many defaulting merchants attempt to conceal or transfer assets, creating additional obstacles for funders.
To address this, judgment attorneys use post-judgment discovery tools, including subpoenas, depositions, and financial record reviews, to trace assets and identify fraudulent transfers.
Today, technology plays a vital role in enforcement. Digital banking data, fintech platforms, and social media analysis often help uncover hidden assets faster than traditional methods. Tools like turnover orders, restraining notices, and emergency injunctions are also used to preserve recovery rights.
However, experienced judgment attorneys understand that enforcement must be both aggressive and compliant, balancing results with legal ethics and procedural fairness.
While MCA disputes are primarily governed by state contract law, federal oversight continues to evolve. Agencies such as the Consumer Financial Protection Bureau (CFPB) and the Small Business Administration (SBA) are taking closer looks at small-business lending practices that mirror consumer risks.
Additionally, interstate disputes raise complex questions about jurisdiction and venue, especially when funders operate across multiple states. Crafting clear, enforceable venue clauses has therefore become a cornerstone of effective MCA contract drafting.
Bankruptcy proceedings present another layer of complexity. When merchants file for Chapter 7 or Chapter 11, funders must quickly file proofs of claim, seek relief from automatic stays, or assert priority claims where applicable.
The Digital Shift: AI and Automation in Collections
The future of MCA enforcement lies in digital integration. Funders are now leveraging fintech systems and AI-powered analytics to predict defaults, track transactions, and detect payment irregularities.
While these tools improve efficiency, they also pose compliance challenges under fair debt collection laws. Legal oversight remains essential to ensure automation aligns with procedural and ethical standards.
Judgment attorneys use similar technologies to streamline document management, e-filing, and interstate enforcement, reducing turnaround times while maintaining accuracy.
To navigate this evolving landscape, funders and their legal partners should adopt proactive compliance and risk management strategies:
Proactive legal guidance can help prevent costly disputes and strengthen the enforceability of collection actions.
The merchant cash advance sector sits at a critical crossroads. As courts refine the definition of what constitutes a true receivables purchase, and as regulators demand greater transparency, funders must evolve alongside the law.
Success in MCA collections now depends not just on aggressive enforcement but on strategic foresight, regulatory awareness, and legal precision.
At David I. Mizrahi Law, P.C., we continue to help funders navigate this shifting terrain with confidence, ensuring every enforcement action is both effective and compliant.
A merchant cash advance (MCA) is structured as a purchase of future receivables, not a loan. Instead of fixed monthly payments, the funder receives a percentage of the merchant’s future sales. Because repayment depends on business performance, MCAs fall outside most state lending and usury laws—provided the agreement properly reflects shared risk.
In some cases, yes. Courts may reclassify an MCA as a loan if the terms guarantee repayment regardless of revenue or if the funder exercises excessive control over the merchant’s account. This reclassification can trigger state usury violations, which is why proper contract language and risk-sharing provisions are essential.
When a merchant defaults, the funder can pursue collection through legal enforcement, including demand letters, lawsuits, and judgment recovery. Depending on the jurisdiction, remedies may include garnishments, liens, or asset restraints. However, each step must comply with state and federal debt collection laws to avoid penalties or procedural setbacks.
COJs have faced increasing limitations. Since 2019, New York law has prohibited out-of-state COJs for non–New York debtors, significantly restricting their use in MCA enforcement. Funders operating in multiple states now rely more on traditional litigation or arbitration to obtain enforceable judgments.
Funders can reduce risk by working closely with experienced judgment attorneys who understand the evolving MCA landscape. Regular contract audits, transparent disclosure practices, and strict adherence to procedural laws all help maintain compliance and preserve enforceability in court.
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Struggling with unpaid invoices? Discover how a collections attorney gives your business the legal power to recover what you're owed, fast and effectively.
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MCA agreements are structured differently from loans, they fall outside many traditional lending laws. However, this distinction must be carefully maintained to avoid legal challenges.