Disclosure — and a note on legal advice
This article is a factual summary of public court records and legislation, not legal advice. If you're in a dispute with an MCA funder, talk to a commercial litigation attorney.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, which is still the MCA industry's 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. This distinction was the legal foundation of the entire product.
The framing was borrowed directly from invoice factoring, which is 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, and no interest.
The problem with providing many businesses with traditional factoring is factoring requires actual invoices. These invoices are formal, documented receivables from specific named customers, usually from other businesses or government entities. Restaurants, nail salons, local plumbers, most retailers and many other small businesses don't issue invoices. While these businesses have real and consistent revenue, they just don't have paper receivables to sell. MCAs were designed to extend this factoring model to "Main Street." Instead of buying invoices, the funder would buy a portion of future revenue. This would be the stream of card sales or deposits the business would earn going forward. Just like with factoring, these would be purchased "at a discount." Legally, this made MCAs something like factoring for businesses that don't invoice, or an evolved form of the same concept.
Factoring vs. MCA — the same idea, different receivables
Invoice Factoring
- Sells existing, already-earned invoices
- Specific named customer owes the money
- Business's customer repays the factor directly
- Business makes no repayments at all
- Legal status as a sale: well-established
Merchant Cash Advance
- Sells a portion of future revenue not yet earned
- No specific customer — anonymous future sales
- Business repays via CC split or daily ACH
- Business is the repayment source
- Legal status: contested for ACH structures
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 and the funder is buying an asset rather than lending money, then usury laws don't apply. By borrowing factoring's legal framework and extending it to future revenue, MCA funders were and are able to charge effective rates that no licensed lender could legally offer.
Our position on MCA products
We are pro-MCA. We think these products are a genuine solution for the right business in the right situation, and we cover their many uses throughout our guides. What we don't support is predatory practices which include misrepresentation of terms, pushing advances on businesses that can't afford to pay them back, or using MCAs as a band-aid for a failing operation. We raise the legal questions on this page because clients who understand what they are signing make better decisions.For the argument to hold up legally, three structural elements had to be present:
Revenue contingency
Repayment had to be genuinely tied to future revenue instead of a fixed dollar amount. In this case, the funder would then technically own a percentage of what the business earned, rather than a guaranteed sum like most ACH MCAs require.
No absolute repayment obligation
If the business failed and had no future receivables to purchase, the funder would bear that loss. A true receivables purchase would have no recourse against the seller if the asset turned out to be worthless.
Performance risk on the funder
The funder had to be exposed to the business's actual performance. If revenue dropped, then payments would drop too. The funder wouldn't be able to simply demand the agreed amount regardless of revenue performance.
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.
CC Split
The funder takes a fixed percentage (the holdback rate) of your daily credit and debit card sales directly from your payment processor. Payments flex automatically with actual revenue: a slow Tuesday means a smaller payment, a busy Saturday means a larger one.
Legal exposure: lower. Revenue contingency is real and mechanically enforced.
ACH Funding
Fixed dollar amounts are debited from your business bank account daily or weekly, regardless of how much revenue actually came in. It is underwritten by predicting future revenues based on past revenues. The agreement may include a reconciliation clause allowing adjustments, but in practice many funders never apply it.
Legal exposure: higher. Fixed payments resemble a loan repayment schedule.
ACH funding has become the predominant MCA structure. As the product has grown 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 core legal question
Picture two trucking companies that each take a $50,000 advance with the same fixed daily ACH payment. One has a record quarter. The other loses its biggest customer and revenue craters. If both keep getting debited the identical amount every business day, the payment clearly isn't tracking either company's actual receivables. That is what makes a court ask whether the funder is really buying future revenue or just collecting on a loan. It is the question at the center of New York's case against Yellowstone.The Yellowstone Capital Settlement (January 2025)
On January 22, 2025, the New York Attorney General announced a consent judgment against Yellowstone Capital and roughly two dozen affiliates. The judgment was entered at $1.065 billion, though the actual relief breaks down differently: roughly $534 million in canceled merchant debt, $16.1 million in restitution, and a $3.4 million payment to the state, plus the vacating of unsatisfied judgments and a permanent ban on Yellowstone operating in the MCA business. It affected over 18,000 small businesses and is the most significant enforcement 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.
What the settlement alleged
Yellowstone settled without a contested trial and neither admitted nor denied the allegations. The following reflects what the Attorney General's office alleged:
- The agreements imposed an absolute obligation to repay a fixed sum, regardless of whether future receivables actually materialized
- Daily ACH debits were fixed regardless of actual revenue. A reconciliation clause appeared in the agreements, but the terms were structured so that almost no merchant ever qualified for an adjustment
- Yellowstone kept recourse against the business owner if payments stopped, a feature of loans rather than true receivables purchases
The practical effect, according to the AG, was that Yellowstone operated as an unlicensed lender charging interest well above New York's legal limits. Most of the headline figure reflects the judgment value and canceled debt rather than cash collected.
Sources: NY AG press release (January 22, 2025) · Consent order and judgment (PDF)
What the settlement does and doesn't do
This was a settlement, not a litigated ruling on the merits. Because Yellowstone neither admitted nor denied wrongdoing, the consent judgment sets no binding precedent and does not, by itself, make ACH MCAs loans as a matter of law, even in New York. What it establishes is direction: the most aggressive state AG in the country is willing to treat fixed-payment ACH MCAs as disguised loans and pursue them under existing usury statutes.
The underlying legal question is still contested. Non-settling defendants in the same case, including Delta Bridge Funding and Cloudfund, have continued to defend the legitimacy of their contracts. The framework courts actually use to separate a genuine receivables purchase from a loan comes from litigated case law (covered below), not from the Yellowstone settlement itself.
Questions about an MCA you've been offered or already have? We'll give you a straight read.
Talk to NickThe 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. 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:
Is there an absolute obligation to repay?
True receivables purchases have no repayment obligation. The funder bought an asset, and if that asset produces nothing, the seller owes nothing. If the agreement requires the business owner to repay a specific sum regardless of revenue, or if it includes a personal guarantee, then courts treat that as evidence of a loan.
Do payments actually flex with revenue?
This is where most ACH MCAs fail. A reconciliation clause on paper, applied to no one. Courts look at what actually happened, not what the contract says it allows. If the funder debited the same dollar amount every day for the entire term regardless of the merchant's revenue, there is no meaningful revenue contingency.
Does the funder bear performance risk?
In a genuine receivables purchase, if the business shuts down and has no future revenue, the funder loses the advance. If the agreement includes recourse against the owner personally, or contains a default provision triggered by the owner closing the business, courts can view that as the funder protecting against the loss of a loan since they are not accepting the risk of a true receivables purchase.
The reconciliation clause trap
Most ACH agreements include a reconciliation clause, and merchants often assume it protects them. Read the mechanics before you rely on it. The burden is usually entirely on you: you have to request the adjustment, supply revenue documentation, and wait for the funder to sign off. Many funders make that process slow or effectively impossible. A clause you cannot actually trigger isn't protection.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) have enacted commercial financing disclosure laws that apply to MCAs, plus a sales-based financing disclosure law in Virginia specifically. These laws do not reclassify MCAs as loans, but they do 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.
| State | Effective | MCAs covered? | Transaction limit |
|---|---|---|---|
| California | Dec 9, 2022 | Yes | Up to $500K |
| New York | Aug 1, 2023 | Yes — FSL § 806 | Up to $2.5M |
| Utah | Jan 1, 2023 | Yes | Up to $1M |
| Virginia | Nov 1, 2022 | Yes — sales-based financing only | Up to $500K |
| Connecticut | Jul 1, 2024 | Yes — sales-based financing only | Up to $250K |
| Florida | Jan 1, 2024 | Yes | Up to $500K |
| Georgia | Jan 1, 2024 | Yes | Up to $500K |
| Kansas | Jul 1, 2024 | Yes | Up to $500K |
| Missouri | Feb 28, 2025 | Yes | Varies |
| Texas | Sep 1, 2025 | Yes — HB 700 removed prior MCA exemption | Varies |
A funder can still argue its product isn't a loan. It just has to tell you what that product costs in terms of APR before you sign. California strengthened its disclosure regime under SB 362, and more states have similar measures moving through their legislatures. The rules keep tightening.
Where this is heading
Read together, the enforcement actions and the disclosure laws point the same way. MCAs are not becoming illegal, but they are becoming regulated. No court has held MCAs categorically unlawful, but specific agreements have been recharacterized as usurious loans, and the risk is shifting from "buyer beware" toward "lender beware." The structures most exposed are fixed-payment ACH advances with reconciliation clauses that exist only on paper. The ones likely to endure are those that behave like what they claim to be.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 use of funds will help your business despite the cost of capital. But the legal picture is relevant in a few specific situations.
If you are reviewing an MCA agreement
Look for a reconciliation clause and understand whether the funder actually applies it. Ask directly: "If my revenue drops 30% next month, how do I request a payment adjustment and what is the process?" A funder with a genuine reconciliation mechanism will have a clear answer. A funder that cannot explain the process probably never intends to apply it. If you don't know how to look for this clause or need a second set of eyes, we are happy to help.
If you are in a dispute with an MCA funder
If your ACH MCA had fixed daily payments with no reconciliation, the Yellowstone framework gives an attorney a viable argument in New York and a persuasive one in other states. Whether that argument succeeds depends on your state's usury laws and the specific terms of your agreement. This is not legal advice. Speak to a commercial litigation attorney.
If you are comparing products
In states with commercial financing disclosure laws, funders are required to give you APR-equivalent figures before you sign. Ask for the disclosure document. Comparing an MCA to a term loan on equal APR footing (not just factor rate vs. interest rate) gives you a meaningful side-by-side cost comparison. You can use our Factor Rate to APR Calculator before making any final decisions.
A note on our position
Pezzula is a broker. We earn commissions when MCA deals close, which is the same incentive every other broker has to avoid raising these questions. We raise them anyway, because clients who understand what they're signing make better decisions, have fewer disputes, and come back. If you want to talk through a specific offer before you sign, reach out directly.Related Guides
Frequently Asked Questions
Written by
Nick
Founder · Pezzula
Nick founded Pezzula to help small business owners cut through the noise around alternative funding. He works directly with business owners to match them with the right product — MCA, term loan, SBA, or otherwise — based on their actual numbers, not a sales pitch.
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