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Authored by: Benjamin Cole Parker
If payday loans grew up and went to business school, they’d look a lot like merchant cash advances, and bankruptcy courts generally aren’t buying such a disguise.
A merchant cash advance (“MCA”) is a substitute form of financing used by businesses to quickly obtain lump sums of cash in exchange future accounts receivables and sales, plus fees.[1] MCAs can prove useful, as they offer rapid funding, repayments tied solely to sales, and easy qualification criteria – especially for businesses with poor credit.[2] Nevertheless, the cash injections afforded by MCAs carry “plainly exorbitant”[3] rates, impede cash flow with high payment frequency, and can leave a business vulnerable due to lax industry regulations.[4] With the line on MCAs blurred between a loan or a sale, the bankruptcy world is seeing ripple effects.
In examining an MCA through a bankruptcy lens, the categorization of the advance as a sale or loan has differing implications for the makeup of the bankruptcy estate.[5] Further, the categorization governs the application of the automatic stay, disputes over cash collateral, preferential transfer claims, as well as the debtor’s ability to challenge claims particularly those of usurious interest.[6] Courts ordinarily focus on three factors when analyzing whether the MCA agreement is a loan or sale: (1) whether a reconciliation provision exists; (2) whether there is a finite term; and (3) whether there is recourse in the event of bankruptcy.[7] Importantly, a key distinction lies in whether the “lender ‘is absolutely entitled to repayment under all circumstances.’”[8] Recent trends show that courts are increasingly characterizing these advances as loans, triggering usury laws. [9] Shouldn’t courts embrace such a recharacterization to shield small businesses from exploitation to predatory rates?
On one hand, loan rate caps can safeguard small businesses from abusive lending practices; on the other, lenders offering MCAs might become more selective in lending and could constrain the total credit they made available. As of early 2023, 29% of small businesses cited lack of capital as a reason for failure.[10] In Haymount Urgent Care, the MCAs provided the company a much needed source of cash flow during a period of ‘economic strain’ in spite of allegations of disproportionate fees.[11] So which interest ultimately tips the scale: the risk of reduced credit extensions or the threat of loans burdened with excessive rates?
Recent caselaw does not indicate there is a clear consensus. However, some courts are showing a growing trending toward classifying the advances as loans. The United States Court of Appeals for the Second Circuit recently upheld the district court’s decision in Fleetwood Servs. LLC, ruling that the MCA was a usurious loan.[12] The district court’s rationale rested on the fact that pursuant to the agreement, “there are virtually no circumstances where, if the accounts receivable would not be sufficient to pay the Purchased Amounts, Richmond would not be absolutely entitled to repayment of that amount by Fleetwood.[13] Alternatively, the U.S. Bankruptcy Court for the Northern District of Illinois found that the MCAs were not loans under New York law but instead sales “in exchange for a portion of [] future receivables…”[14] Still, the judgments and settlements of 2025 keep the ball of uncertainty rolling.
Earlier this year, the New York Attorney General’s (“NYAG”) office cracked down on Yellowstone Capital for over predatory loans the firm made to over 18,000 small businesses across the nation.[15] These predatory loan agreements falsely used MCA language – e.g. “Purchase and Sale of Future Receivables – in order to lure businesses in and impose inflates rates.[16] NYAG’s office and Letitia James unveiled a judgment and settlement against Yellowstone Capital as well as its affiliates and officers for over $1 billion in its campaign to squash such predatory lending.[17] The settlement highlights the force with which states are cracking down on exploitative financing, but ironically, the NYAG’s office explicitly stated they do not condemn MCA practice as a whole.[18] There is no question that certain MCA use is highly criticized, but there seems to be little doubt that such lending offers critical financing for small businesses needed alternative funding.
Following such an enormous settlement, a New York court ruled on September 24, 2025, in an important state law decision, that a cash advance transaction between Apollo Funding and Dave Reilly was not a loan.[19] Using the three-factor test, the judge found no evidence of a disguised loan since the agreement allowed adjustments of payment, did not have a fixed term, and did not make bankruptcy an event of default.[20] Such a ruling complicates the trend of characterizing the agreements as loans but underscores the fact that carefully drafted agreements can still be found to be true sales of receivables.[21] Per the NYAG’s office, lenders “would be well served to review their contractual arrangements and operations in light of the issues that the identified in the Yellowstone complaint.”[22]
Ultimately, the MCA landscape remains subject to a delicate balancing scale. There is little doubt that courts are increasingly scrutinizing such agreements, and the Yellowstone settlement seems to indicate that state officials are now on high alert regarding these transactions. Two questions appear to be at the front line of the MCA conversation: (1) how will lenders adjust their pricing, scheduling, and agreement standards to account for heightening scrutiny from authorities, and (2) how far will judges and regulators go in cracking down on predatory prices without suppressing legitimate MCA financing? The future remains anything but certain, yet courts and regulators alike are beginning to sketch the outline of the alternative financing landscape. One thing is certain: the façade of predatory lenders passing of exploitative loans as equitable receivers is nearing an end.
[1] Update on Merchant Cash Advances: Quick Money Paybacks Are Still Hell, Branson Law, PLLC (March 17, 2025), https://www.bransonlaw.com/blog/update-on-merchant-cash-advances-quick-money-paybacks-are-still-hell.
[2] Eddie Rybarski et al., The Pros and Cons of Merchant Cash Advances, ondeck (August 22, 2024), https://www.ondeck.com/resources/pros-and-cons-merchant-cash-advances.
[3] Haymount Urgent Care PC v. GoFund Advance, LLC, 609 F. Supp. 3d 237, 250 (S.D.N.Y. 2022).
[4] Jamie Johnson et al., Pros and Cons of Merchant Cash Advance Loans, Business.com, (April 28, 2025), https://www.business.com/articles/pros-and-cons-of-merchant-cash-advance-loans.
[5] See Robert D. Aicher William J., Characterization of A Transfer of Receivables As A Sale or A Secured Loan Upon Bankruptcy of the Transferor, 65 Am. Bankr. L.J. 181, 185 (1991) (underscoring the fact that UCC reflects no intention to provide guidance on the sale/loan categorization).
[6] In re Shoot The Moon, LLC, 635 B.R. 797, 835 (Bankr. D. Mont. 2021) (holding that a downward adjustment of the MCA fee was warranted).
[7] Lateral Recovery, LLC v. Cap. Merch. Servs., LLC, 632 F. Supp. 3d 402, 452 (S.D.N.Y. 2022).
[8] Id.
[9] Id. at 466.
[10] Maddie Shepherd, Small Business Lending Statistics and Trends, fundera by nerdwallet (January 23, 2023), https://www.fundera.com/resources/small-business-lending-statistics.
[11] 609 F. Supp. 3d 237 at 172.
[12] Fleetwood Servs., LLC v. Richmond Cap. Grp. LLC, No. 22-1885-CV, 2023 WL 3882697, at *2 (2d Cir. June 8, 2023), Aff’g Fleetwood Servs., LLC v. Ram Cap. Funding, LLC, No. 20-CV-5120 (LJL), 2022 WL 1997207, at *20 (S.D.N.Y. June 6, 2022).
[13] Fleetwood Servs., LLC, No. 20-CV-5120 (LJL), 2022 WL 1997207, at *13.
[14] In re Hill, 589 B.R. 614, 630 (Bankr. N.D. Ill. 2018).
[15] Parag Patel et al., NY Attorney General Secures $1 Billion-Plus Judgment For Illegal Loans Misrepresented as Merchant Cash Advances, Latham and Watkins LLP, Global Fintech and Digital Assets Blog (February 7, 2025), https://www.fintechanddigitalassets.com/2025/02/ny-attorney-general-secures-1-billion-judgment-for-illegal-loans-misrepresented-as-merchant-cash-advances.
[16] Id. (“Overcollection from merchants was a frequent occurrence, such as daily payments debited from merchants’ bank accounts even after the agreed amount was paid back in full.”)
[17] Id.
[18] Id.
[19] Apollo Funding Co. v. Dave Reilly Constr., LLC, No. 2024-03453, 2025 WL 2714439, at *2 (N.Y. App. Div. Sept. 24, 2025).
[20] Id.
[21] Id.
[22] Parag Patel, supra note 15 (noting that various states continue to scrutinize MCAs).
American Journal of Trial Advocacy 