MCA Legal Rights Hub: Know What Protections You Have

Because a merchant cash advance (MCA) is not legally classified as a loan, its associated documentation differs significantly from that of standard lending. This page explains how MCAs are structured, what the main provisions in a purchase agreement actually do, and where to find more details on each.

While Value Capital Funding is not a law firm, we provide complimentary debt guidance. We can help connect you with an attorney if a funder is pursuing legal action against your business.

How an MCA Is Legally Classified

An MCA is written as a purchase of future receivables rather than a loan. On paper, you aren’t borrowing money and agreeing to repay it with interest. Instead, you’re selling a portion of revenue you haven’t earned yet, at a discount, and the funder collects it as that revenue arrives. 

That structure is why the documents say “advance” rather than loan, “purchase agreement” rather than credit agreement, and “factor rate” rather than interest rate. It’s also the reason MCAs have historically sat outside much of the regulation that governs lending. 

The question of whether an agreement functions as a true purchase or is effectively a loan in practice has been the subject of frequent litigation. The answer turns on the specific terms and on the jurisdiction, and it isn’t something a business owner can settle by reading their own contract. 

For more on the regulatory landscape, see Are Merchant Cash Advances Legal?

Why the Classification Matters

Usury limits, which cap what a lender can charge, are written for lending. So are many of the disclosure obligations and borrower protections that businesses might reasonably expect to apply.

Where a transaction is treated as a purchase rather than a loan, those frameworks may not apply in the same way. That single distinction underlies most of what makes MCA debt behave differently from bank debt, from its cost structure to what happens when payments stop.

Factors Evaluated in Court Disputes 

When judicial bodies examine whether a cash advance is genuinely a purchase or effectively a loan, they typically focus on several key contractual terms: 

• Functional Reconciliation Provisions: Whether the agreement contains a realistic, workable process to reduce daily payment amounts when business revenue declines.
• Indefinite Duration: Whether repayment depends on incoming revenue rather than a fixed schedule.
• Absence of Absolute Repayment: Whether the funder assumes the actual risk of uncollected receivables, or if the contract forces the company to pay regardless of business performance.

These reflect issues courts weigh rather than a formula you can apply to your own contract. Two agreements with comparable language can produce entirely different outcomes. 

Provisions Worth Understanding in Your Agreement

Confessions of Judgment

A confession of judgment (COJ) is a clause in which the business, and often the owner personally, waives the right to contest a claim in advance, allowing a funder to obtain a judgment without a trial. Their use has been restricted in some jurisdictions.

UCC Lien

A UCC lien is a public filing registering the funder’s claim against business assets. It can block other financing while it remains in place. See How to Remove a UCC Lien.

Reconciliation Clause

A reconciliation clause is the provision that allows repayments to be adjusted if revenue drops. Worth locating in your own agreement, because whether it exists and how it works varies considerably.

Personal Guarantee

A personal guarantee is a commitment that makes the owner personally liable, potentially putting personal assets at risk in ways the business structure would otherwise prevent. 

Related Reading: MCA Glossary

Where the Rules Are Changing

For most of their history, merchant cash advances sat outside the disclosure rules that apply to lending, but that has been changing steadily since 2022, and the number of states involved has continued to grow.

A growing number of states now require a standardized disclosure before funding, typically covering the amount financed, the total dollar cost, the total repayment amount, and the payment schedule. Some also require an estimated annual percentage rate, which is the figure that makes a factor rate comparable to conventional credit, and several require providers or brokers to register. Florida has its own Commercial Financing Disclosure Law, in sections 559.961 to 559.9615, with coverage that depends on thresholds and exemptions set out in the statute.

These are transparency rules rather than caps on cost. An MCA remains legal in every state; what has changed is what a funder must tell you before you sign. 

In March 2023, the Consumer Financial Protection Bureau determined that the disclosure laws then in force in California, New York, Utah, and Virginia were not preempted by the federal Truth in Lending Act, because TILA governs consumer credit, whereas these laws govern commercial financing. Several states have legislated since, outside the scope of that determination. 

In practice, a recently signed advance may carry disclosures that an older agreement didn’t. Where an estimated APR is shown, it’s a better basis for comparison than a factor rate alone. 

If You Think Something Is Wrong

If you believe a funder is acting outside the terms of your agreement, pursuing amounts you don’t owe, or using collection practices that concern you, that’s a matter for an attorney.

Two existing guides may help you understand what you’re dealing with: The Dirty Tactics of MCA Debt Collector Scams and How to Write a Debt Collector Dispute Letter.

At Value Capital Funding, we understand the challenges businesses face in managing MCA debt and the threat of debt collector scams. We offer free, no-obligation advice on your debt position and the options available to you.