The reconciliation clause is the whole case.

In a New York merchant cash advance case, the reconciliation clause is where the sale-versus-loan question gets decided. A clause the funder may honor at its sole discretion, or a mandatory clause it never honored, is evidence that repayment was absolute. Absolute repayment means a loan, and a business loan above 25 percent per year is ordinarily void.

What is a reconciliation clause in a merchant cash advance agreement?

A reconciliation clause in a receivables purchase agreement ties the funder’s fixed daily or weekly debit back to your real sales. The agreement says the funder bought a stated percentage of future receipts. Reconciliation is the true-up that makes the debit match that percentage when revenue drops.

The mechanics are the same whatever the funder calls its paper. The agreement recites a purchase price, the money you received, and a larger purchased amount it may collect. It names a specified percentage of receipts, then sets a fixed debit called a good faith estimate of it.

That estimate is the fault line. A percentage of sales moves. A fixed debit does not. Reconciliation is the only bridge. Without it, the funder collects the same whether you had a record month or none.

Find the clause in your own document. It is often not labeled “Reconciliation,” but buried in a paragraph on adjusting the estimated payment.

Why is the reconciliation clause central to the LG Funding analysis?

The LG Funding analysis asks whether the funder is absolutely entitled to repayment under all circumstances. The Second Department weighs three factors: whether the agreement contains a reconciliation provision, whether it has a finite term, and whether the funder has recourse if the merchant declares bankruptcy. Reconciliation is the first factor.

Law: LG Funding, LLC v United Senior Props. of Olathe, LLC, 181 AD3d 664 (2d Dept 2020).

The rule underneath is short. Usury requires a loan. Unless the principal advanced is repayable absolutely, the transaction is not a loan. The court judges the transaction in its totality, by its real character, not by the name the parties gave it. The factors are weighed, and none decides the case alone.

Now the application. In LG Funding, the agreement said the funder “may, upon [the merchant’s] request, adjust the amount of any payment due under this Agreement at [its] sole discretion and as it deems appropriate.” Permissive verb. Sole discretion. No standard, no method. The same agreement made a bankruptcy filing an event of default accelerating the uncollected purchased amount, allowing enforcement of the guaranty, and requiring a confession of judgment. Those terms, the court said, suggested the funder had not assumed the risk of less revenue than expected, or none.

The consequence was procedural and decisive. Denial of the funder’s motion to dismiss the criminal usury affirmative defenses was affirmed. Summary judgment failed because the funder had not eliminated triable issues as to whether this was a criminally usurious loan. The counterclaim was dismissed, though: a business asserts criminal usury as a defense, not as a claim. Usury works as a shield.

Law: CPLR 3211(a)(1); CPLR 3211(a)(7); CPLR 3212; General Obligations Law 5-521(3); Limited Liability Company Law 1104(c).

Compare the outcome when the clause has teeth. In Principis Capital, the agreement provided for adjustments to the monthly payments based on changes in the merchant’s monthly sales. Because the payments could change, the term was not finite. No provision made a bankruptcy declaration an event of default. The Second Department held the transaction was not a loan, reversed, and granted the funder summary judgment.

Law: Principis Capital, LLC v I Do, Inc., 201 AD3d 752 (2d Dept 2022).

Two appellate decisions, opposite results, and the adjustment language moved them. Note what did not. The LG Funding guaranty ran only to performance of the merchant’s representations and covenants, and the funder still lost.

Change one verb in the reconciliation clause and you change which side survives the motion.

Which contract terms make a receivables purchase agreement look like a loan?

Four sets of terms do most of the sorting in New York: the reconciliation language, the term of repayment, the treatment of bankruptcy, and the security taken at closing. Here is how each reads on the sale side and the loan side.

No single row decides the case. Courts read the terms together, then look at what the parties did.

What does a properly made reconciliation request look like?

A properly made reconciliation request follows the notice terms of your own receivables purchase agreement to the letter. It is in writing. It goes to the address, email, or portal the agreement names, by the method it requires, inside any stated window, with the records the clause asks for attached.

No New York statute prescribes the form of the request, and the state disclosure law governs disclosures, not reconciliation. The clause is the rule. Build the request to defeat the objection the funder will make later, which is always that you never asked.

• Written, dated, signed by an authorized signatory, and addressed exactly as the notice provision directs.
• Identifying the agreement by date, quoting the reconciliation paragraph by number, and stating the specified percentage, the actual receipts, and the debit that percentage produces.
• Attaching the bank or processor records, and requesting a written response by a date certain.
• Kept with proof of transmission: a delivery receipt, sent-mail record, or certified mail card.

If the clause’s deadline has passed, send it anyway. A late unanswered request still shows how the clause functioned. Never reconstruct one after the fact.

What must the funder do when it receives a reconciliation request?

What the funder must do on receipt depends on the verbs in the reconciliation clause. A clause saying the funder shall adjust the debit creates an obligation, and ignoring a conforming request can be a breach of the agreement. A clause saying the funder may adjust in its sole discretion creates far less, which is precisely the point.

Take the mandatory version first. The obligation is contractual, so the remedy is contractual, and you must show a conforming request and a resulting loss. At the pleading stage, the First Department has sustained breach claims by merchants alleging that funders withdrew unauthorized amounts and refused reconciliation.

Now the discretionary version. Here silence helps you more than a refusal would. If the clause gave the funder unfettered discretion, your obligation never really depended on your receipts. That is evidence of absolute repayment. The First Department has pointed to the discretionary nature of reconciliation provisions, plus allegations that the funder refused reconciliation and set daily rates not reflecting a good faith estimate, as enough to allege the agreements were loans.

Law: Davis v Richmond Capital Group, LLC, 194 AD3d 516 (1st Dept 2021).

The funder is in a vise of its own drafting. Mandatory language plus inaction is a breach claim. Discretionary language plus inaction is evidence of a loan.

What if my agreement has a mandatory reconciliation clause but nothing ever happened?

A mandatory reconciliation clause that never operated cuts hard against the funder, because the conduct contradicts the document. The First Department has treated proof that no reconciliation was performed in practice, despite mandatory provisions in the agreements, as part of a holding that transactions styled as merchant cash advances were properly characterized as usurious loans.

Law: People v Richmond Capital Group LLC (1st Dept, Feb. 19, 2026, Case No. 2024-02969); Executive Law 63(12).

Take that decision for what it gives you. It arose from an Attorney General enforcement proceeding; the appellate court left liability standing while vacating the monetary part of the judgment and remanding on the amount. Executive Law 63(12) belongs to the Attorney General, not to you. The characterization reasoning is yours.

A funder that ignores a conforming reconciliation request has answered the only question the case was going to turn on.

What evidence decides a reconciliation fight?

Three categories of evidence decide a reconciliation fight: your bank statements, the reconciliation request itself with proof of delivery, and the funder’s response or silence. Bank statements show what the debits actually were against what actually came in. The request shows you invoked the clause. The response, or the absence of one, shows what the clause was worth.

• Bank statements. Every month from the funding date forward, and twelve before. Debits in one column, deposits in another. Look for a debit that never moves while deposits fall.
• Processor statements. If card settlements are the receipts at issue, processor reports are the cleanest proof of percentage against volume.
• The request. The email, letter, or portal message, with headers, timestamps, or mailing receipt. Print it as sent, not retyped.
• The funder’s response or silence. Any reply, partial adjustment, document demand, or refusal. If there was no reply, the gap in the correspondence is the exhibit.
• The collection record. Default notices, bounced-debit fees, and the amount claimed after acceleration.

Do not close the debited account without advice; a closed account can be recast as your breach. Delete nothing, including broker messages saying the daily amount could be lowered.

What happens if the receivables purchase agreement is really a loan?

If the receivables purchase agreement is really a loan, and the effective rate exceeds 25 percent per year, a business borrower may raise the criminal usury defense. The Court of Appeals has held that a criminally usurious loan is void, with the result that neither principal nor interest is collectible. That is the whole exposure, not a rate reduction.

Law: Penal Law 190.40; General Obligations Law 5-521(1), (3); Adar Bays, LLC v GeneSYS ID, Inc., 37 NY3d 320 (2021).

The Second Department has applied that consequence to receivables purchase paper. Where the terms showed absolute repayment and the funder did not dispute an annual rate above 25 percent, the court treated the agreement as criminally usurious and vacated the default judgment against the merchant.

Law: Crystal Springs Capital, Inc. v Big Thicket Coin, LLC, 2023 NY Slip Op 05121 (2d Dept 2023).

The statutory structure matters to you as a business owner. A corporation cannot interpose the ordinary civil usury defense, and that bar reaches limited liability companies. It does not apply to a defense of criminal usury as described in Penal Law 190.40. So 25 percent per year is your number.

Two limits belong in the same breath. Usury is your affirmative defense, so the burden of proof is yours. And neither cap applies to an advance of 2.5 million dollars or more.

Law: General Obligations Law 5-501(6)(b).

The rate is computed from real figures: what you received, what the funder collects, all fees, and the time collection actually takes. Compress the period and the annualized cost climbs. That arithmetic is why funders fight so hard.

Does New York’s disclosure law give me a claim?

New York’s Commercial Finance Disclosure Law requires providers of sales-based financing to give standardized disclosures, including an estimated annual percentage rate, when they extend a specific offer of financing. It reaches offers of 2.5 million dollars or less. Mandatory compliance began August 1, 2023.

Enforcement sits with the Department of Financial Services, and the statute creates no private right of action. Do not build your defense on it, and do not expect it to reach an earlier advance. Still find the sheet: the rate the provider itself calculated may be a useful admission.

Law: Financial Services Law 801-812, in particular 803 and 812; 23 NYCRR Part 600.

What should you do first?

If you have been sued, or the debits have outrun your sales, the label on the document is not the end of the inquiry. Whether that label holds is a question of fact, and the reconciliation clause is where it gets answered. Do these in order now.

• Find the agreement, the guaranty, and every addendum. Copy the reconciliation paragraph word for word, including “may,” “shall,” “sole discretion,” and any notice requirement.
• Download your bank statements now, before an account is frozen.
• Search your email and phone for anything you sent asking for a lower debit, and for the reply or lack of one.
• Calendar your deadline to answer or move. That clock starts on service, and its length depends on how service was made, so fix both dates in writing.
• Preserve everything and stop explaining yourself to the funder’s collectors.
• Get New York counsel who will plead criminal usury as an affirmative defense and treat the debit history as the core discovery target.

The funder wrote the reconciliation clause. If it never used it, that is not your problem. It is theirs.