What a Merchant Cash Advance Really Is, and What to Do When It Goes Wrong

MCA Defense · KVasquez Law, Brickell, Miami

A business owner who takes a merchant cash advance rarely describes it as borrowing. The money arrives in a day or two, there is no committee, and the paperwork is short. The paperwork is short because it is not a loan agreement. It is a purchase and sale of future receivables, and that distinction decides what can be argued later.

The question matters because loans are regulated and sales of receivables largely are not. If an advance is a loan, Florida's usury statutes apply. Section 687.03 makes interest above the equivalent of eighteen percent per annum usurious on obligations of five hundred thousand dollars or less. Above that figure the ceiling becomes the rate set by section 687.071, which treats interest above twenty-five percent as criminal usury, a second-degree misdemeanor up to forty-five percent and a third-degree felony above it. Subsection (7) of that section provides that a loan made in violation is not an enforceable debt in the courts of this state. If the same transaction is a true sale of receivables, none of that applies.

How courts decide whether it is a sale or a loan

Funders draft toward the sale characterization deliberately, and courts have developed a workable test for it. The most frequently cited formulation comes from New York, where most of these agreements are venued, and looks at three features.

• Reconciliation. Does the agreement give the merchant a genuine right to adjust the daily or weekly debit when receipts fall? A reconciliation provision that is discretionary, or that imposes conditions the merchant cannot practically satisfy, undercuts the sale characterization.
• Finite term. Is there a fixed date by which the full amount must be repaid? A true purchase of receivables carries the risk that collections take longer than expected. A fixed maturity looks like a loan.
• Recourse on failure. What happens if the business closes without fraud? If the funder can pursue the merchant or a guarantor for a shortfall caused by ordinary business failure, the funder has not accepted the risk a purchaser accepts.

No single factor resolves it. An agreement that recites a reconciliation right the funder never honors in practice is a different document from the one that was signed, and the course of dealing is evidence.

The confession of judgment

For years the standard enforcement device was a confession of judgment signed at closing. It allowed a funder to enter judgment on an affidavit of default, without a complaint, without service, and without the merchant appearing. Accounts were frozen before the owner knew a case existed.

New York amended CPLR 3218 effective 30 August 2019 to bar the entry of judgment by confession against a debtor who does not reside in New York. That closed the practice for most out-of-state merchants going forward. It did not undo judgments already entered, and funders continue to use other routes, including arbitration clauses, New York venue provisions and personal guaranties signed by owners who did not read them as guaranties.

The UCC filing is the quiet problem

Nearly every advance is accompanied by a UCC-1 financing statement covering all assets. A single filing is manageable. Three or four, stacked, will stop a bank refinance before underwriting starts, because no lender will take a junior position behind a blanket lien it cannot quantify.

Filings also outlive the obligation. A funder that has been paid in full has no further interest to perfect, but the termination statement does not file itself. Clearing stale filings is often the first step toward conventional capital, and it is frequently the step nobody has taken.

What to do when an account is frozen

A restraining notice served on a bank reaches the account immediately. Payroll, rent and vendor payments stop that day, which is the point of it.

The response is procedural rather than rhetorical. Exempt funds must be identified. The underlying judgment should be examined for jurisdictional and service defects, which are common where a New York judgment was entered against a Florida business. Where the judgment is sound, the question becomes what the funder will accept to release the restraint, and that negotiation goes better before the business has missed a payroll than after.

Where defenses usually exist

Agreements are drafted quickly and signed quickly, and that cuts in both directions. The defenses that recur are these: a reconciliation right the funder refused to honor; a daily debit the funder continued after receipts collapsed; fees that function as interest and push the effective rate past the section 687.071 threshold; a personal guaranty that by its own terms covers fraud and misrepresentation only, not business failure; and service or jurisdiction defects in a judgment entered out of state.

None of these is automatic. Each depends on the specific document and on what the parties actually did after signing.

What the firm does on these matters

The work begins with reading every agreement, every amendment and the complete debit history, because the course of dealing is usually where the argument is. From there it is UCC searches and terminations, response to restraining notices and garnishments, defense of confession of judgment actions, negotiation of settlements and payoffs, and, where the business is viable, restructuring the stack so that conventional financing becomes possible again.

Karina A. Vasquez handles these matters directly, in English or Spanish, from intake through resolution.

This article is provided for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship with KVasquez Law. Statutes and case law change, and outcomes depend on the specific agreement and the facts of each matter. Consult a qualified attorney about your circumstances before acting.