Is Your MCA Actually a Loan? Why the Legal Distinction Matters in Practice

The purchase label settles nothing. An agreement calling itself a purchase of future receivables can still function as a loan when the funder bears no genuine risk, and New York courts examine substance rather than headings. That examination follows identifiable factors rather than slogans.

The Label Is the Least Reliable Part of the Contract

New York authority states the governing premise. A transaction must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it. A label can be printed in seconds, while the allocation of risk behind it decides the case. Labels are inexpensive and extremely durable.

In LG Funding v United Senior Properties, decided by the Second Department in 2020, the court stated the companion rule. Unless a principal sum advanced is repayable absolutely, the transaction is not a loan. The inquiry turns on whether the funder was entitled to repayment under all circumstances or depended on receipts that might never arrive.

The contract was, if we are being precise, less a purchase than a schedule of withdrawals in acquisition vocabulary. Often we see owners defend the label on the first page while later provisions describe unconditional collection. Counsel should ensure the entire agreement is read before character is addressed.

The heading describes the transaction the funder wished to have made.

A funder may describe the arrangement as risk sharing in order to support its legal position. What the funder discloses, or withholds, about reconciliation practice matters more than the funding summary.

The label sits on the contract the way a new sign sits on an old building: visible from the street, and structurally irrelevant.

The Three Factor Test in New York Courts

Everything turns on three elements the LG court weighed together: reconciliation, a finite term, and whatever recourse survived bankruptcy. No single element controlled; the three formed one picture of risk.

The New York appellate opinion on absolute repayment supplies the figures. United sold future receivables for $100,990 against a purchased amount of $129,267.20, arithmetic near 1.28, though the opinions do not use the commercial label for that ratio. Numbers of that kind invite a usury discussion without completing one.

The clause permitted adjustment upon request at the funder's sole discretion, language the court emphasized in sustaining a triable defense of criminal usury. That reservation is a peculiar form of protection.

The same agreement made default render the full uncollected purchased amount plus all fees immediately due and payable, treated a written admission of inability to pay or a bankruptcy filing as an event of default, and recorded individual guaranties of performance of the business representations, provisions which together left collection nearly unconditional.

Counsel should ensure any assessment distinguishes that guaranty of performance (which attached to representations and covenants rather than to payment as such) from broader undertakings in other agreements. The scope of the promise decides the exposure.

Simply reading the payment schedule does not answer the classification question. Assemble and hold the agreement, the collection ledger, and every reconciliation request with its response.

How Later Courts Applied the Test

In 2025, the Fourth Department revisited the question in Bridge Funding v SimonExpress Pizza, a dispute over twenty five percent of future revenues. The agreement contained two reconciliation provisions, reaching past and future collections upon request with proof. The later appellate decision on reconciliation provisions held those provisions were not illusory, distinguishing an earlier decision containing sole discretion language.

The court also treated the term as not finite where reconciliation could alter payments, since a term that adjusts with receipts resists a fixed endpoint. Whether that reasoning extends beyond these facts, this article cannot answer from a New York record alone.

Commentary sometimes attributes the concurrence's broader test to the court itself. The majority decided the case before it. An owner who relies on the concurrence as law mistakes a warning for a rule, and I have yet to see a reconciliation clause written in plain terms.

The Richmond Order and the Federal Action

The Richmond record supplies the contrast. Mandatory reconciliation there was held a total sham, while permissive reconciliation on request was held simply insufficient on the facts presented. The affidavits were sworn. Several were false, and filings built upon them were held fraud.

The January 2022 federal settlement barring RAM Capital Funding and its owner from both industries rests on its own allegations and order. An enforcement action against particular providers does not render every advance fraudulent or void.

The order binds the parties it names.

Using the Analysis in Negotiation

Classification is one part of a larger review. A finding that an advance functions as a loan identifies which rules may apply, while borrower type, size, and statutory exceptions still determine the available defense and relief. Published decisions are few (most funding disputes never reach an opinion), so counsel should state the limits of the assessment.

Delancey Street offers a free confidential initial review for owners weighing MCA debt pressure. The company conducts settlement negotiation as a settlement company, not as a law firm, and independently licensed counsel addresses characterization and defenses within that engagement. Owners should confirm eligibility, availability, and scope before engaging.

Any statement to the collecting party, even casually, can narrow the options counsel retains. Resist the urge to treat a favorable label as the end of the work. Protect and preserve the contract record, the payment history, and every communication about reconciliation, since a later decision rests on those papers. It is extremely useful to distinguish what counsel concluded from what the creditor agreed to change. Obligations outlive the names given to them, and the papers decide what the names cannot.