Usury and MCA contracts: when the cap applies and when it does not

Somebody told you the advance is illegal because the rate works out to 90 percent. Maybe a competitor's owner said it, maybe a message board did. It is a reasonable thing to believe, because the number really is that high. It is also more complicated than the person who told you understood.

Usury statutes cap what a lender can charge on a loan. Merchant cash advance agreements are drafted to be purchases of future receivables, not loans. That single structural choice is what has kept the product outside usury limits in a large share of cases, and it is why the usury question in this industry is really a characterization question wearing a different hat.

Usury caps attach to loans, not purchases

Every usury statute in the country presupposes a loan or forbearance of money. If a transaction is a genuine sale of an asset, the price the buyer pays and the value the buyer receives are not interest, they are the terms of a sale.

So a usury defense to an MCA has to clear a threshold before it clears the rate. Counsel must first persuade a court that the agreement is really a loan, using the true sale analysis courts apply to these deals: whether reconciliation is real, whether the term is finite, and whether the funder retained recourse if the business genuinely failed. Only then does the rate matter.

This is general information about how the doctrine operates, not legal advice, and usury statutes vary substantially from state to state. A licensed attorney has to evaluate your specific agreement and the governing law clause inside it.

What the numbers look like when you annualize

Take a common structure. A funder advances $100,000 at a 1.42 factor rate, so the payback is $142,000. Collections run $860 per business day over roughly 165 business days, which is about eight months.

The cost is $42,000 on $100,000, which is 42 percent of the amount funded. It is tempting to stop there and scale it up, 42 percent over eight months, so roughly 63 percent a year. That understates it by about half, and the reason matters.

You never hold $100,000 for eight months. The balance starts falling the first business day and reaches zero at the end, so the average amount outstanding is far below the face amount. Price the schedule the way a lender would, by finding the rate at which 165 payments of $860 are worth $100,000 today, and the daily rate is about 0.45 percent. Across roughly 252 business days that is an annualized cost near 113 percent.

Now assume the merchant also paid a $3,500 origination and underwriting fee at closing, so only $96,500 actually landed in the account. The same schedule against the smaller advance runs closer to 126 percent.

Shorter terms make it worse, not better. The same $42,000 cost collected over four months rather than eight pushes the annualized figure well past 200 percent. This is why a fast paying advance can be the most expensive money a business ever takes.

Funders respond that annualizing is misleading because a true receivables purchase has no term. If receipts slow, collections slow, and the effective cost falls. That argument is coherent when reconciliation actually functions. It falls apart when the daily amount never moves regardless of what the business does.

New York's two caps and the corporate carve out

Because so many MCA agreements select New York law, its framework comes up constantly.

New York sets a civil usury rate of 16 percent under Banking Law section 14-a and a criminal usury rate of 25 percent under Penal Law section 190.40. General Obligations Law section 5-521 generally bars a corporation from asserting the civil usury defense, but New York courts have permitted corporate borrowers to raise criminal usury as a defense to enforcement of a loan.

There are dollar thresholds too. General Obligations Law section 5-501 exempts larger transactions from these limits, with the civil cap generally inapplicable above $250,000 and the criminal cap generally inapplicable above $2.5 million. Most MCA deals sit well below those ceilings, which keeps the argument live for typical advance sizes.

The remedy can be severe. In Adar Bays, LLC v. GeneSYS ID, Inc., the New York Court of Appeals held that a loan found to be criminally usurious is void. That is a meaningful consequence, and it is precisely why funders draft so carefully to stay on the purchase side of the line.

Why the argument succeeds in some cases

The wins share a pattern. The reconciliation clause was illusory or the funder ignored requests. The daily amount never changed across months of documented revenue decline. The contract made bankruptcy or a good faith closure an event of default. Fees were deducted at funding in a way that inflated the effective cost.

Federal decisions in the Southern District of New York, including Fleetwood Services, LLC v. Ram Capital Funding, LLC and Haymount Urgent Care, P.C. v. GoFund Advance, LLC, allowed usury theories to move forward or found the transactions before them to be loans. Regulators have pressed related theories as well. The Federal Trade Commission brought enforcement actions against RCG Advances and against Yellowstone Capital over collection and contract practices, and the New York Attorney General has litigated against Richmond Capital Group and affiliated entities.

Why it fails in other cases

The losses share a pattern too. The funder can produce records showing it actually adjusted collections when asked. The contract's reconciliation right is workable and was used. Recourse on default is limited to breaches like fraud, misrepresentation, or diverting card volume, rather than ordinary business failure.

New York's Appellate Division has upheld MCA agreements as true purchases in cases including Principis Capital, LLC v. I Do, Inc. Courts also apply a presumption against usury, and the party asserting it typically carries a demanding burden of proof. Judges are reluctant to void a commercial agreement between sophisticated parties on a record that is merely suggestive.

There is one more practical reality. Usury is fact intensive, which means discovery, expert work, and motion practice. That is a long and costly road for a business already short on cash.

State law varies more than most summaries admit

New York dominates the case law because so many agreements select it, but do not assume its framework travels.

Some states exempt corporate and commercial borrowers from usury limits entirely, which removes the defense before the characterization question is even reached. Some have a civil cap but no criminal usury statute, which changes the remedy from voiding the obligation to something far more modest, such as forfeiture of interest. Some apply a presumption against a finding of usury and require proof by clear and convincing evidence, a demanding standard on a paper record.

Then there is the governing law clause itself. Whether a court applies the chosen state's law or the law of the merchant's home state is its own contested question, and it can decide the case before anyone reaches the merits.

What to document if you think this fits your file

Whether or not you ever litigate, four things make the argument evaluable:

1. Every written request you made for reconciliation, with dates, and every response.
2. Bank statements and revenue reports showing what your receipts actually did over the collection period.
3. A ledger of every debit taken, including returned item fees, compared against what the contract specified.
4. The funding statement showing the amount actually deposited versus the stated purchase price, so fees taken at closing are visible.

Assemble those before you pay anyone to assess the claim. A file with that record can be evaluated in an hour. A file without it usually cannot be evaluated at all.

What a usury argument is actually good for

Used well, it does two things. It creates real settlement leverage, because a funder facing a credible recharacterization claim has an incentive to resolve the matter quietly. And it protects a merchant who is being sued, because the defense can be raised without the merchant filing an affirmative case.

Used badly, it becomes a reason to do nothing while daily debits keep clearing. That is the failure mode to avoid.

We do not litigate. We handle the negotiation side, reconciling what has actually been collected against what is claimed and working out a resolution with the funder, while experienced MCA defense counsel evaluates whether the characterization and usury arguments in your file are worth pressing. Historically, negotiated resolutions in this space have fallen in the range of 40 to 60 cents on the dollar. That describes past negotiations across many files, not a projection for yours, and every file turns on its own facts.

Start by running the annualized math on your own agreement and pulling every reconciliation request you ever sent. Those two documents tell you quickly whether this argument has anything behind it.