Is a Merchant Cash Advance a Loan?
Is a merchant cash advance a loan? What courts look at.
A merchant cash advance is written as a sale, not a loan. The funder buys a share of your future sales at a discount, so usury limits on loan interest usually don't apply. Courts check whether it's really a sale by looking at the risk the funder takes: whether payments adjust when sales fall, whether there's a fixed end date, and whether the funder can still collect after a bankruptcy.
What three things do courts check?
| Question | Points to a sale | Points to a loan |
|---|---|---|
| Can payments change if sales fall? | Yes, through a working reconciliation clause | No, the payment is fixed no matter what |
| Is there a fixed end date? | No, it lasts as long as sales take | Yes, a set term like a loan |
| Can the funder collect if the business goes bankrupt? | No, bankruptcy isn't a default | Yes, the owner owes it regardless |
These come from New York's Appellate Division in the LG Funding case, listed under Sources. Other courts use similar tests. No single answer decides it. The court reads the whole contract and how it was carried out.
Which of the three can an owner test?
Reconciliation. A contract that lets the payment follow your sales, and actually adjusts it when you ask, looks like a purchase of receivables. A fixed payment that never moves, with a set end date, looks more like a loan.
Why does it matter to you?
- Price: loan interest limits generally don't reach a true sale, which is why factor rates can be high.
- Payments: a real sale has to let your payment follow your sales. That's your reconciliation right.
- Guarantees: an owner guarantee of performance fits a sale. A guarantee to pay no matter what looks more like a loan. See the personal guarantee guide.
- Disclosures: several states now require cost disclosures for sales-based financing even though it isn't a loan. See the state list.
What does this look like with real numbers?
Two contracts, same numbers: $40,000 advanced, $54,000 to be delivered. Contract A takes 12% of daily card sales and has a reconciliation clause the funder honors. Contract B takes $450 a business day no matter what, has a 120-day term, and makes the owner pay in full if the business files bankruptcy. Contract A reads like a sale. Contract B has all three loan features. If B were treated as a loan, its cost would be tested against the state's interest limits.
What should you check in your own contract?
- Is there a reconciliation section, and does it say how often you can ask?
- Does the contract say bankruptcy by itself isn't a default?
- Is there a fixed number of payments or an end date?
- What does the personal guarantee actually guarantee?
This is general information, not legal advice. For your contract and your state, talk to a business lawyer. Applying is free, and you never pay Afterfirst a fee. The funder pays our commission only if a deal funds, and the amount is in the offer paperwork before you sign.
Questions about your file?
Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.