Sued by a merchant cash advance company in New York.

A merchant cash advance is written as a purchase of your future receivables, not as a loan. That single distinction is what keeps it outside New York’s usury limits, and whether it survives contact with a court is usually the whole case. New York has a settled three-factor test for deciding it.

The structure is always the same. A funder advances a sum today and buys a percentage of tomorrow’s sales, collected by fixed daily or weekly debits. An owner signs a personal guaranty. When the debits stop, the funder sues the business and the guarantor for the unpaid balance, and often for fees on top of it.

Why does it matter whether it is a sale or a loan?

Because loans in New York have a ceiling and purchases do not. If the transaction is really a loan, the effective annual rate on a typical advance can be extraordinary, and a rate above twenty-five percent per year exposes the agreement to criminal usury. If it is genuinely a purchase of receivables, none of that applies.

Funders draft carefully to stay on the purchase side of the line. Courts look past the labels to what the agreement actually does.

Law: Penal Law 190.40; General Obligations Law 5-521.

What test do New York courts apply?

The Appellate Division weighs three features of the agreement. The question in each is whether the funder truly took on the risk of your business, which is what makes a purchase a purchase.

• Is there a reconciliation provision? A true purchase of a percentage of sales adjusts when sales fall. A fixed daily debit that never moves looks like repayment.
• Is the term indefinite? A purchase has no maturity date — it ends when the receivables are delivered. A fixed end date looks like a loan.
• Does the funder have recourse if the business fails? If the agreement makes an honest business failure an event of default, the funder never took the risk it claims to have bought.

Law: LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664 (2d Dept 2020); Principis Capital, LLC v. I Do, Inc., 201 A.D.3d 752 (2d Dept 2022).

The question is not what the agreement is called. It is whether the funder actually bought the risk it says it bought.

My company is a corporation. Can it raise usury at all?

Yes, for criminal usury. New York bars a corporate borrower from raising civil usury, but that bar does not extend to the criminal usury rate. The Court of Appeals has held that a loan made at a criminally usurious rate is void, and that a corporate borrower may say so.

Law: Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021).

What about the reconciliation I asked for and never got?

That is often the strongest fact in the file. Many agreements promise that the merchant may request reconciliation when revenue drops, and specify how. A funder that ignored a properly made request has both weakened its own characterisation of the deal and, on many agreements, breached it.

Keep every request you sent and every response you did not receive. In this kind of case the emails are the evidence.

What if there is a confession of judgment?

Check who signed it and where they lived. New York narrowed this device significantly: a confession of judgment may not be entered against a person who did not reside in New York when it was signed. Confessions obtained from out-of-state merchants are vulnerable, and a judgment entered on one can be attacked.

Law: CPLR 3218(a).

What this means for you

Do not treat the balance in the demand letter as the amount at stake. Pull the signed agreement and read the reconciliation clause, the default clause and the term. Gather the bank records showing what was actually debited and when the revenue fell. If your agreement has a fixed term, no working reconciliation, and a default clause that fires when the business fails honestly, the transaction has a real problem — and so does the balance built on top of it.