Why the Distinction Matters Legally
MCA vs. Business Loan

The label on the first page settles nothing. A court will read the repayment obligation, the allocation of risk, and the remedies on default before deciding what the parties made.

That reading can change the claims available, the defenses worth raising, and the price of being wrong about either one.

The Substance Behind the Label

Begin with what happens when receipts fail, not with the heading above the signature line. An agreement that calls itself a purchase while requiring payment in every circumstance invites the question New York courts ask about absolute repayment.

In LG Funding v United Senior Properties, the Appellate Division identified reconciliation, a finite term, and bankruptcy recourse among the features relevant to that question. The full appellate opinion on absolute repayment should be read by counsel before any conclusion about a different agreement is drawn.

New York courts have applied this substance over form inquiry across decades of financing disputes, long before the current MCA docket gave it fresh work. Rarely does a single clause decide the characterization question on its own.

How Reconciliation Actually Works

Six months after funding, when receipts have fallen and the fixed debit has not, the reconciliation clause gets its first serious reading. What the provision requires at that point matters more than what it promised at signing.

A functioning mechanism adjusts collections to verified receipts through a defined exchange of records, which becomes extremely important when memories of telephone assurances differ. Whether a given clause does that depends on its language and on the record of requests, responses, and supporting statements the parties created.

Simply keep the complete exchange rather than a summary composed after the disagreement hardened. What the owner volunteers, or withholds, when requesting an adjustment can affect the later reading of good faith.

A financing party may draft the adjustment language in order to preserve the appearance of risk sharing while retaining a fixed claim on the account. There are readings that favor the funder, though in practice they tend to confirm the need for counsel rather than settle anything. A refused request does not, without more, convert the transaction into a loan, and a printed clause answers nothing about what the financing party demanded in practice.

Reconciliation was available on paper. On the account statements the debits never changed.

A Loan That Collects by Percentage

The collection method describes how money moves. Counsel must still determine what the business owes when receipts stop, and that determination decides the product.

PayPal Working Capital illustrates the point from the other direction: its published terms describe a business loan with a single fixed fee, repaid through a percentage of PayPal sales alongside minimum repayment requirements. The sales based collection never made it a purchase, and fourteen pages of definitions cannot change what the payment obligation requires on a slow month. Keep the product name, the issuer, and the signed terms in one file. Marketing labels overlap across products from the same company while the contractual duties differ, and the comparison must identify the obligation the business accepted.

Governing Law and Available Defenses

Usury limits and the consequences of loan characterization differ across jurisdictions and across transactions. The choice of law provision, the amount involved, and the corporate form of the borrower can each affect which defenses exist. An outlandish implied cost still proves nothing about enforceability, and a high calculated figure alone establishes nothing about whether a court will disturb the agreement.

Delancey Street offers a free confidential initial review where the legal character of an MCA affects the commercial options, and an owner can ask whether the account qualifies for settlement assistance. The company acts as a settlement company and coordinates legal questions with independent counsel, since it is not a law firm.

Ask the adviser to ensure that the proposed course leaves room for legal review. Counsel should ensure no deadline passes while the characterization question is briefed. No company can ensure a result from a label or a preliminary calculation.

Ask what triggers the so called reconciliation window and what proof it demands. Any assurance given by telephone, even casually, should be confirmed in writing before the owner relies upon it.

Procedure Moves While Substance Is Debated

A defense worth having can still be lost to a missed date. Litigation or arbitration moves on its own calendar while the characterization question is briefed, and a business that treats a strong argument as permission to ignore a deadline learns that forums enforce their own rules first and reach the merits when they reach them. The file grows the way a drawer grows full: one unanswered letter at a time.

And resist the urge to ignore a demand because an article described similar advances as unlawful. That assumption grows extremely expensive the week a deadline passes, when most owners read the remedies section for the first time after the default notice arrives, and that timing is human.

Negotiations suspend nothing unless the forum says so, and any extension must be confirmed through the process the tribunal recognizes. The owner should gather the agreement, assemble the payment history, and preserve every exchange about reconciliation in one file. That file will matter more than any summary composed from memory.

Most MCA agreements describe flexibility in marketing and demand rigidity in the remedies section. I have yet to see a reconciliation clause that operates without friction, though such clauses continue to be drafted as if receipts never fall. Counsel should read and assess the papers while the underlying agreement remains under review. The owner who negotiates from the document rather than the advertisement carries a habit that serves every financing decision after this one, including the choice of what claim against the business to resolve first.