Are Merchant Cash Advances Loans? What Courts Have Actually Decided

The Original "Not a Loan" Argument

Merchant cash advances emerged in the early 2000s as a way to get capital to small businesses that couldn't qualify for bank loans. From the beginning, funders structured them deliberately as purchases of future receivables rather than loans — and the MCA industry still defends that framing today. Why the industry makes that argument, and where it holds up vs. where it doesn't, is covered in depth in our companion piece: Why the MCA Industry Says It's Not a Loan. The distinction was not incidental — it was the legal foundation of the entire product.

The framing was borrowed directly from invoice factoring — a financing method that has existed for centuries and whose legal status as a receivables purchase, not a loan, is well established. In factoring, a business sells invoices it has already earned to a third party at a discount. The factor then collects payment from the business's customers directly. No loan, no repayment obligation on the seller, no interest.

The problem factoring has always had is that it requires invoices — formal, documented receivables from specific named customers. A restaurant doesn't issue invoices. Neither does a nail salon, a plumber collecting cash at the door, or a retailer ringing card sales all day. These businesses have real, consistent revenue — they just don't have paper receivables to sell. MCAs were designed to extend the factoring model to them: instead of buying invoices, the funder would buy a portion of future revenue — the stream of card sales or deposits the business would earn going forward. Legally, this made MCAs something like factoring for businesses that don't invoice, or an evolved form of the same concept.

State usury laws cap the interest rates that lenders can charge on loans. In many states, charging 80% or 120% APR on a loan is illegal. But if a transaction is not a loan — if the funder is buying an asset rather than lending money — usury laws don't apply. By borrowing factoring's legal framework and extending it to future revenue, MCA funders could charge effective rates that no licensed lender could legally offer.

For the argument to hold up legally, three structural elements had to be present:

Courts accepted this framing for roughly two decades. As long as the agreement looked like a receivables purchase on paper, most courts did not look too closely at whether the mechanics actually worked that way in practice.

CC Split vs. ACH Funding: Why the Structure Matters Legally

Not all MCAs are structured the same way, and the structure is exactly what courts have focused on. There are two repayment methods, and their legal exposure is very different.

ACH funding has become the predominant MCA structure. The product grew beyond its card-processing origins — it's now available to contractors, trucking companies, and any business with consistent bank deposits, not just card-heavy retailers. That shift made MCAs more accessible, but it also weakened the legal argument that they are genuinely revenue-contingent.

The Yellowstone Capital Ruling (January 2025)

On January 22, 2025, the New York Attorney General secured a consent order and judgment ordering Yellowstone Capital and its affiliates to pay $1.065 billion in debt cancellation, restitution, and penalties — affecting over 18,000 small businesses. It is the most significant legal action against the MCA industry to date.

The Attorney General's theory was straightforward: Yellowstone's ACH-structured MCAs were not genuine purchases of future receivables. They were disguised loans, structured to look like receivables purchases in order to evade New York's criminal usury statute, which caps loan interest at 25% per year for business loans.

The practical effect was that Yellowstone was operating as an unlicensed lender charging rates that violated New York's usury laws. The $1 billion+ figure reflected both restitution to affected merchants and civil penalties.

Sources: NY AG press release (January 22, 2025) · Consent order and judgment (PDF)

The Reconciliation Test: How Courts Tell Them Apart

Courts do not simply look at what an agreement calls itself. A contract titled "Receivables Purchase Agreement" is not automatically a receivables purchase. What matters is how it actually functions — and courts have developed a framework, sometimes called the reconciliation test, for making that determination.

As the law firm Pullcom put it in their analysis of this issue: "Agreements styled as 'merchant cash advances' or 'receivables purchases' may actually be loans if they impose an absolute obligation to repay."

The three factors courts look at:

State Disclosure Laws: Nine States Now Treat MCAs Like Credit

Parallel to the litigation track, a regulatory track has been moving in the same direction. Nine states — California, New York, Connecticut, Florida, Georgia, Kansas, Missouri, Utah, and Texas — plus Virginia for sales-based financing specifically, have enacted commercial financing disclosure laws that apply to MCAs. These laws do not reclassify MCAs as loans. What they do is require MCA funders to disclose cost information in the same standardized format that lenders use under the federal Truth in Lending Act.

New York's law, codified at Financial Services Law § 806, includes a dedicated section for MCA and factoring transactions with a disclosure format specific to those products. Required disclosures include the total amount financed, total repayment amount, total cost of financing, an APR-equivalent figure, and the payment schedule. Texas took a stricter step in 2025: HB 700 (signed June 20, effective September 1) removed a pre-existing exemption that had allowed MCA funders to claim their transactions were conclusively "not loans" by contract — closing a loophole the MCA industry had used to avoid Texas disclosure requirements entirely.

These disclosure obligations treat MCAs like credit products for regulatory purposes without changing their legal classification. An MCA funder can still argue their product is not a loan — they just have to tell you what it costs in APR-equivalent terms before you sign.

What This Means If You Have or Are Considering an MCA

For most people, the legal classification is background context — what actually matters is whether you can afford the payments and whether the cost of capital makes sense for what you need the money for. But the legal picture is relevant in a few specific situations.

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