Yes, merchant cash advances are legal in the United States. A merchant cash advance is a purchase of part of your future sales, not a loan, so the interest rate caps that apply to loans do not apply to it. That answer comes with a condition, though, and the condition is where most of the confusion and most of the lawsuits come from. An advance is only treated as a sale while it actually behaves like one. When a contract strips out the risk the funder is supposed to carry, courts in New York, whose law governs many of these contracts, have treated it as a loan, and a loan priced like an advance can be criminally usurious.
The question matters to a lot of owners. The Federal Reserve's 2026 Small Business Credit Survey found that 33% of employer firms had trouble making payments on their debt, and 7% use merchant cash advances regularly. This post covers how courts tell a sale from a loan, what really happens if you cannot pay, whether a funder can freeze your bank account, and the realistic ways out. It is general information rather than legal advice, and for a specific contract a business attorney is the right call.
Why a merchant cash advance is not a loan
When you take an advance, the funder pays you a lump sum and buys a fixed amount of your future receivables in return. You repay through a share of your sales, usually by daily or weekly debit, until that amount has been collected. Because the funder is buying something rather than lending money, it charges a factor rate instead of interest, and state usury laws, which cap the interest a lender can charge, do not reach it. You can read more about the mechanics on our revenue-based financing page.
The stakes in that distinction are high. In New York the civil usury limit is 16% a year and the criminal limit is 25%, according to the state's Department of Financial Services. A business generally cannot use the 16% civil limit as a defense, but it can use the criminal one, and the state's highest court held in Adar Bays v. GeneSYS that a criminally usurious loan is void from the start. Advances often cost far more than 25% a year when the cost is annualized, so if a court decides a particular advance is really a loan, the funder can lose the right to collect it.
How courts decide whether an MCA is really a loan
The leading case is LG Funding v. United Senior Properties of Olathe, decided by a New York appellate court in 2020. The court said a transaction is only a loan if repayment is absolute, and it weighed three things to decide: whether the contract has a reconciliation provision, whether it has a finite term, and whether the funder has recourse if the business goes bankrupt. In that case, reconciliation was at the funder's sole discretion, bankruptcy counted as a default, and a confession of judgment and personal guaranty kicked in if the business failed. The court found the funder had not really taken on the risk of low sales, and let the owner's usury defense go forward.
Courts have kept applying the same test. In February 2026 a New York appeals court held in People v. Richmond Capital that the advances in that case were loans, because reconciliation was never performed, payments were fixed, and closing the business let the funder enforce the guaranties. A week later, in Kapitus v. Suburban Waste, the same court found the features of another contract were mixed and sent the question to trial. Regulators have acted too. In 2025 the New York Attorney General announced a $1.065 billion judgment against Yellowstone Capital, saying its fixed daily debits worked out to annual rates as high as 820%, and the FTC won bans and a $20.3 million judgment in its case against RCG Advances.
None of this makes advances illegal. It means the contract has to match the product. A funder that honors reconciliation, sets no fixed deadline and accepts the loss when a business fails in good faith is selling a legal product, and that is the kind of advance worth taking.
Reconciliation is the clause to read first
Most funders collect a fixed daily or weekly amount that is meant to approximate the agreed share of your sales. Reconciliation is the process that brings the payment back in line with that share when your sales change. If revenue drops and the payment stays the same, the payment eats a growing slice of every sale, and the advance starts to behave like a loan with a fixed installment.
Reconciliation usually does not happen on its own. California's financial regulator has advised small businesses that they generally have to tell the funder about their situation to get the adjustment. If your sales have slowed, ask in writing, attach recent bank statements, and keep a copy of everything you send. A funder that refuses a well-documented request, or whose contract leaves reconciliation entirely to its own discretion, is the kind of contract courts look at most closely.
What happens if you can't pay a merchant cash advance
Missing a payment sets off a sequence that most contracts spell out in their default section. The order below is typical, although contracts and state laws differ and some funders skip steps.
The first consequence is usually a returned-payment fee from the funder and an NSF fee from your bank. If payments keep failing, or if you block the debits or move your deposits to a different account, the funder can declare a default, and many contracts then make the entire remaining balance due at once. This is also when the personal guaranty matters. Most advances are guaranteed by the owner, but the type of guaranty makes a large difference. A performance guaranty covers your promises under the contract, such as keeping deposits in the agreed account and not diverting receivables. A payment guaranty covers the debt itself. One sample advance agreement filed with the SEC guarantees performance and states that a business going under or slowing down is not, on its own, a breach. That is how a true sale is supposed to work.
If the default is not resolved, the funder may send notices to your customers. Under Section 9-406 of the Uniform Commercial Code, a creditor with a security interest in your receivables can tell the people who owe you money to pay it directly. Your customers can keep paying you until they receive a valid notice, and they are entitled to ask for proof of the funder's claim. After that comes a lawsuit or an arbitration claim, and eventually a judgment.
Can MCA lenders freeze your bank account?
In most cases, only after a court judgment. In New York, the notice that freezes a bank account, called a restraining notice, comes from a judgment creditor, as the state's highest court explained in Cruz v. TD Bank. A UCC filing on its own does not freeze anything. The shortcut used to be the confession of judgment, a document signed at closing that lets a funder get a judgment without a lawsuit. New York stopped accepting confessions of judgment against out-of-state businesses in 2019, and Virginia and Texas have banned them in these contracts outright.
There are exceptions to watch for. NPR reported in March 2026 on Connecticut contracts that waived the owner's right to a hearing before a freeze, which let a marshal freeze accounts on the funder's word. A 2023 Connecticut law limited that for advances under $250,000. Courts and regulators also scrutinize how judgments are obtained; in June 2026 the New York Attorney General sued an arbitration service it says was set up with an advance company to produce thousands of judgments. If your account has been frozen, talk to a business attorney quickly, because there are deadlines for challenging a judgment.
What happens to MCA debt if you go out of business
Under a true sale, the funder bought a share of sales that may never happen, so if the business fails in good faith without breaking the contract, the funder is supposed to absorb the loss. That is the trade-off that keeps the advance outside usury law. In practice it depends on the contract. If closing the business or filing for bankruptcy counts as a default that triggers the guaranty, the funder has shifted that risk back to you, and the Richmond Capital court treated exactly that feature as a sign of a loan.
Bankruptcy adds another layer. If the advance is a true sale, the receivables the funder bought are not part of the bankruptcy estate, so the automatic stay does not protect them; if it is really a loan, they are, as Hunton Andrews Kurth explains. Small businesses often look at Subchapter V of Chapter 11, which has a debt limit of $3,424,000, and Fredrikson notes that several stacked advances can push a business over that limit. Bankruptcy is a last resort with long consequences, and it needs a bankruptcy attorney.
How to get out of a merchant cash advance
The right exit depends on whether the business is still trading well. If revenue is sound and the problem is the shape of the payments, there are good options. If the business is failing, the options narrow and the help you need is legal rather than financial. In rough order, these are the routes worth trying.
- Talk to your funder before you miss a payment. Ask for reconciliation in writing with your bank statements attached, or ask whether it will lower the payment and extend the term. Funders generally prefer a slower recovery to a default.
- Refinance or consolidate. If two or more advances are debiting your account every day, a single new facility can pay them off and replace them with one weekly or monthly payment on a longer term.
- Move to an SBA or bank loan once you qualify. The SBA's updated lending rules, in effect since October 1, 2026, loosened an earlier ban on refinancing merchant cash advance debt, although active advances generally still do not qualify, according to a summary from the Coleman Report of SBA SOP 50 10. Our SBA and bank loans page lists what those lenders ask for.
- Get legal help if the contract may be a disguised loan, if you are being sued, or if your account has been frozen. An attorney can negotiate a settlement or raise the defenses described above.
- Consider bankruptcy only as a last resort, and only with a bankruptcy attorney.
Two moves usually make things worse. The first is stacking, which means taking another advance to cover the payments on the ones you already have; each new position adds another daily debit to the same account and is usually priced higher than the last. The second is a debt settlement company that tells you to stop paying and block the funder's debits. In the NPR story above, a firm gave exactly that advice, took its fee and disappeared, and the owner's account was frozen soon after. Stopping payments without a lawyer and a plan in place is how a manageable problem becomes a judgment.
The rules depend on your state
Ten states now require funders to disclose the cost of an advance in a standard form before you sign, according to a March 2026 summary by Venable. Texas went further in 2025 with HB 700, which voids confessions of judgment, limits automatic debits, and requires providers and brokers to register with the state by December 31, 2026.
How we can help
If your business is trading well but the daily debits are crowding out payroll, we can look at consolidating your advances into one payment on a longer term. The new funder pays your existing funders directly, and we show you the new total and the new schedule side by side with what you pay now, so you can decide whether the trade-off is worth it. Tell us which funders you have, the balances and the daily amounts, and send payoff letters if you have them.
Start your application or call us at (818) 351-0225 to talk it through first. If you have not signed anything yet and are holding an offer, read how we beat an existing MCA offer before you sign it.
Questions owners ask about MCA debt
Are MCA loans illegal?
No. A merchant cash advance is a legal purchase of future receivables. A specific contract can be challenged if it works like a loan, for example when reconciliation is never honored or the owner must repay no matter what happens to sales, and a court may then apply usury limits to it.
What makes a loan illegal?
Generally, charging more than the state's usury limit or lending without a required license. In New York the criminal usury limit is 25% a year, and a loan above it can be void. Because a true merchant cash advance is not a loan, these limits only come into play when a court decides the advance was really a loan.
Are MCA loans personally guaranteed?
Most are. The important question is what the guaranty covers. A performance guaranty makes you answerable for breaking the contract, such as diverting deposits, while a payment guaranty makes you answerable for the balance itself. Read that clause before you sign.
Can MCA debt be forgiven?
Sometimes, through a negotiated settlement, a court ruling that the contract was a usurious loan, or bankruptcy. In the Yellowstone case, the New York Attorney General's settlement cancelled $534 million owed by more than 18,000 businesses. For an ordinary advance that was fairly priced and properly run, forgiveness is unusual, and refinancing is the more realistic route.
Is a merchant cash advance bad for my business?
Not by nature. An advance is fast and repayment follows sales, which suits businesses with steady card or deposit revenue and a short-term need. It becomes a problem when it is expensive, stacked on top of other advances, or written without real reconciliation. Comparing offers and reading the contract solves most of that, and we go through every offer with you before you sign.
Can you get an SBA loan if you have MCA debt?
It is possible, especially under the SBA rules in effect since October 1, 2026, but an open advance makes approval harder because the lender has to see enough cash flow to cover both. Many owners consolidate first and move to an SBA or bank loan once their numbers support it.
