Protect Your MCA Funding from Usury Claims in NYC

Usury and How It Relates to Merchant Cash Advance Funding

In the fast-paced world of merchant cash advance (MCA) funding, where businesses snag quick capital based on future sales, funders face a lurking threat: usury claims. Picture this: you’ve advanced $50,000 to a merchant, expecting a percentage of their receivables in return, only to find yourself in a New York courtroom defending against accusations that your agreement is an illegal loan charging excessive interest. This scenario isn’t hypothetical—it’s the reality unfolding in courts across the country. For MCA funders, understanding usury and crafting ironclad contracts isn’t just smart—it’s survival. Let’s dive into why usury matters, how it threatens your investment, and how a merchant cash advance attorney can help your business with savvy contract drafting.

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What Is Usury, Anyway?

Usury is the illegal practice of charging excessive interest on a loan, and in New York, it’s not just a civil slap on the wrist—it’s a crime. Under New York Penal Law § 190.40, anyone who “knowingly charges, takes or receives” interest exceeding 25% per annum commits criminal usury in the second degree, a class E felony. For MCA funders, the stakes are high: if a court deems your agreement a loan rather than a purchase of future receivables, you could lose your advance, face penalties, or worse. Merchants often wield usury as a defense when they default, claiming the MCA’s terms are predatory. But here’s the good news: courts frequently uphold MCAs as legitimate purchases—if they’re structured right.

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Loan or Purchase? The Legal Line in the Sand

So, how do courts decide if your MCA is a loan subject to usury laws or a bona fide purchase? The three-factor test New York courts use:

1. Reconciliation Provision: Does your agreement let the merchant adjust payments based on actual sales? Best case scenario, your contract mandates reconciliation, allowing adjustments to reflect the merchant’s real receipts—not a fixed sum. This flexibility screams “purchase,” not “loan.”
2. Indefinite Term: Is there a set repayment deadline? Model agreements have “no time period during which the Purchase Amount must be collected.” No fixed term? No loan.
3. Bankruptcy Recourse: Does bankruptcy trigger a default? Model contracts limit the funder’s recourse if the merchant goes bust, specifically as it pertains to bankruptcy. This type of limited recourse reinforces the purchase argument.

In Samson MCA LLC v. Joseph A. Russo M.D. P.C. (2023), the Fourth Department tossed a usury defense because the MCA checked these boxes. Principis Capital, LLC v. I Do, Inc. (2022) followed suit. The lesson? Nail these factors, and courts are likely to dismiss usury claims.

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Fortifying Your MCA Against Usury Attacks

Here’s how to bulletproof your MCA agreements:

• Mandate Reconciliation: Include a clause, requiring payment adjustments based on actual receipts. It proves payments hinge on sales, not a fixed debt.
• Ditch Fixed Terms: State explicitly there’s no repayment deadline. The “no time period” language is gold—copy it.
• Limit Bankruptcy Recourse: Don’t make bankruptcy a default event. It shows you’re not guaranteed repayment, a hallmark of a purchase.
• Add Clear Disclaimers: Revise your contract to scream, “THIS AGREEMENT IS NOT A LOAN.” Make it loud and clear.
• Document Everything: Treasure the remittance history and text exchanges. This will assist in crushing the merchant’s fraud and capacity defenses. Keep meticulous records.

Compliance with New York law is non-negotiable—disclose terms upfront and avoid interest-like fees that could tip the scales toward usury.

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The Payoff: Enforceable Agreements

A rock-solid MCA contract doesn’t just dodge usury—it wins in court. Work with an MCA attorney who knows New York’s ropes, and you’ll recover with force, not flounder in legal quicksand. In this game, good drafting isn’t optional—it’s your lifeline.

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