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Alabama MCA Debt Relief: What Your Business Needs to Know

Most Alabama businesses that sign a merchant cash advance agreement do not get it what they have agreed to until the daily withdrawals begin. The contract, which ran to fourteen or fifteen pages in most of the ones we have reviewed, describes itself as a purchase of future receivables. The language is deliberate. A purchase of receivables is not a loan, and a transaction that is not a loan falls outside the reach of Alabama's usury statutes, its consumer protection framework, and most of the regulatory architecture that governs commercial lending in the state. That classification, if it holds, permits the funder to collect at rates that would be impermissible under any other label.

Whether that classification holds is the question which matters.

The Regulatory Gap

Alabama has not passed legislation governing MCAs. The state regulates payday lending under the Deferred Presentment Services Act (Ala. Code §§ 5-18A-1 et seq.), which caps loan amounts and limits fees, but those protections apply to consumer transactions only. Commercial financing products sit outside that framework. California passed its own disclosure requirements. New York has pursued enforcement actions against MCA funders at a pace and scale that no other state has matched. Alabama has done neither.

The consequence is that an Alabama business owner who signs an MCA is governed primarily by the terms of the contract and by whatever state's law the contract designates. In most cases, that state is New York. The funder is based in New York. The contract was drafted there. The governing law clause points there. The Alabama business owner signed the agreement from a desk in Birmingham or Huntsville or Mobile, but the legal architecture around that signature was constructed elsewhere.

This is not unusual.

What Alabama Law Does and Does Not Prohibit

Alabama Code § 8-8-1 sets the general usury limit at eight percent per annum on written contracts. Section 8-8-12 provides that usurious contracts can’t be enforced beyond the principal sum borrowed. On their face, these provisions would render most MCA agreements unenforceable if the agreements were classified as loans: the effective annual rates on merchant cash advances routinely exceed one hundred percent, and in the contracts with the most aggressive terms, the rate approached several hundred percent when calculated on an annualized basis.

Section 8-8-5 complicates the analysis. Under that provision, parties to a loan of two thousand dollars or more may agree to any rate of interest, regardless of the statutory cap, provided that unconscionability protections under the Alabama Mini-Code (Title 5, Chapter 19) still apply. The section effectively removes the usury ceiling for commercial transactions above that limit. A funder whose MCA is recharacterized as a loan in Alabama may now argue that the rate, however extreme, was contractually agreed upon and falls within the exclusion.

The unconscionability carve-out is where the argument starts to run into pushback. Alabama courts retain the authority to examine whether the terms of a transaction are so one-sided as to be unconscionable, and the Mini-Code's protections were protected by the same statute that lifted the usury cap. In practice, the question is not simply whether the rate was agreed to. It is whether the agreement itself was the product of a fair bargain or of a disparity in understanding so significant that enforcement would offend the conscience of the court. The answer, in our experience, depends on the specific contract, the specific funder, and the circumstances under which the agreement was done.

I am less certain about how Alabama state courts will apply the unconscionability standard to an MCA than I would like to be. The case law is thin because so few of these disputes are litigated in Alabama; funders prefer New York forums, and most Alabama merchants do not contest the debt at all.

The Loan That Was Never a Purchase

The central legal question in MCA defense is whether the transaction is what the contract says it is. The contract says it is a purchase of future receivables. The funder's behavior often says the other way around.

Courts in New York, Florida, and New Jersey have coalesced around a three-part framework for determining whether an MCA is a true purchase of receivables or a loan structured to avoid that classification. The framework looks at three features of the agreement and the funder's conduct.

The first is whether the agreement contains a functioning reconciliation provision. Reconciliation is the mechanism by which daily or weekly payments adjust to reflect the merchant's actual revenue. A genuine purchase of future receivables is contingent: if the business earns less, the payment should go down proportionally. If the payment is the same fixed amount regardless of what the business earned that week, the transaction functions as a loan with fixed installments. The reconciliation clause appears in the contract. The funder does not honor it. Merchants who request adjustment receive either silence or denial under criteria never disclosed at origination.

The second is whether the agreement has a definite term. A true receivables purchase has no fixed maturity date; repayment depends on the speed at which future sales materialize, which is inherently uncertain. But many MCA agreements end up creating a de facto fixed term that one can calculate by dividing the total repayment amount by the daily withdrawal, yielding a number of business days that functions as a maturity date the contract declines to name.

And the third, which in practice does more work than the other two, is whether the funder bears genuine risk in the event of the merchant's bankruptcy. If the merchant's bankruptcy triggers a default clause (and in the contracts we review, it almost always does), and if the funder holds a personal guarantee from the business owner (who, in the contracts we review, has invariably signed one, often without fully comprehending that the guarantee transforms what was presented as a business obligation into a personal one, exposing the owner's home, savings, and every other asset to a claim that was supposed to attach only to business receivables), then the funder has recourse that eliminates the risk distinguishing a purchase from a loan. A buyer of receivables accepts that if the business fails, the receivables vanish. A lender demands repayment regardless. The personal guarantee blurs the distinction.

Funders know their reconciliation clauses do not work. They draft them to survive a first reading, not a second.

The Yellowstone Capital enforcement action in New York brought these questions to national attention when the Attorney General alleged that a network of affiliated entities had been issuing short-term instruments at annualized rates that, by the Attorney General's calculation, exceeded eight hundred percent in some agreements, the instruments structured as receivables purchases but serviced in every operational respect as fixed-payment loans with no genuine contingency, no functioning reconciliation, and full personal guarantee enforcement across multiple jurisdictions. The settlement that followed was substantial. The underlying findings confirmed what people in this space had been seeing for years, which is that the contractual label does not determine the judicial outcome when the operational reality contradicts it.

Whether this analysis will produce the same results in Alabama's courts is a question I can’t answer from this desk. But the contracts Alabama merchants are signing are the same contracts. The funders are the same funders. The reconciliation clauses are identical in language and identical in their failure to function.

Enforcement Beyond Alabama's Borders

In 2019, New York prohibited MCA funders from filing confessions of judgment against out-of-state borrowers. Before that change, an Alabama business owner who had signed a confession of judgment could discover that a judgment had been entered in a New York court without notice, without a hearing, and without any opportunity to contest the underlying obligation. The business owner would only find out about the judgment when their bank account got frozen.

The prohibition put a stop to the worst of it. But funders have since filed confessions of judgment in other jurisdictions, including Texas, Illinois, and Utah, and the practice of filing UCC-1 liens against business receivables continues regardless of where the business operates.

New York's enforcement posture has shifted in ways that affect states that have taken no regulatory action. The FAIR Business Practices Act, signed into law in December 2025, expanded the Attorney General's authority to pursue "unfair" and "abusive" practices. The elimination of the prior "consumer-oriented" requirement means MCA collection tactics, including aggressive demand letters and improper UCC-1 filings, now fall within the scope of Attorney General enforcement. For Alabama business owners, this matters because their contracts are governed by New York law, and the enforcement actions that reshape funder behavior originate there. A funder that’s been under investigation by the Attorney General enters settlement negotiations differently than one that has not.

The FTC's actions have added a federal dimension. The Commission’s action against the Yellowstone group led to funds being returned to affected small businesses, the first time the FTC had directed money to commercial borrowers in an MCA matter. The precedent is instructive even for businesses whose funder was not involved, because it signals a federal willingness to treat MCA practices as within the Commission's enforcement jurisdiction.

Alabama does not need its own MCA statute to benefit from these shifts. The law that governs the contract is New York law. The actions that hold funders accountable come from New York and federal regulators. An Alabama business owner's position in a settlement negotiation is shaped by what is happening in courtrooms the business owner will never visit.

The Process of Restructuring MCA Debt

The first step in any MCA engagement is a review of every agreement the business has signed. Many businesses have taken on more than one; stacking, where a second advance covers the payments on the first, is common enough that we see it in most of the matters we handle, sometimes three or four advances deep. Each agreement must be examined for the reconciliation provision, the personal guarantee, the governing law clause, the confession of judgment clause if one exists, and the UCC-1 filing that accompanies most MCA agreements.

The second step, which is often the most urgent, is to determine whether the daily or weekly ACH withdrawals can be paused or reduced while the review is underway. In some cases, even redirecting deposits to a new account at a different institution is a necessary measure. This step carries risks, and the timing matters.

What needs to happen, in sequence:

• Obtain and review all MCA agreements and amendments

• Analyze each contract for recharacterization indicators under the three-prong framework

• Assess any UCC-1 filings and judgments already entered

• Determine whether ACH withdrawals should be redirected or paused

• Begin negotiation with the funder or initiate formal dispute

What we do differently (and this is a procedural choice rooted in what we have observed when the standard approach is followed) is complete the recharacterization analysis before initiating any contact with the funder. The standard approach is to open with a settlement offer. We start with a legal assessment, since the strength of the recharacterization argument determines, in something like nine cases out of ten, the terms the funder will accept. A funder who knows its contract will not survive scrutiny settles on different terms than a funder who believes its position is secure.

What Representation Requires

The distinction between a debt relief company and a law firm matters more in MCA defense than in almost any other category of commercial debt. A debt settlement company can’t represent a business in court. It can’t raise a usury defense. It can’t challenge a UCC-1 filing or move to vacate a confession of judgment. It can negotiate, and negotiation is often sufficient, but when it is not, the business owner finds out about the limitation at the worst possible moment.

There is a particular silence in a conference room when a business owner realizes the person they hired to handle the debt can’t appear in court that has just entered a judgment. We have sat in that room more times than the preceding sentence should require.

The letter from a funder arrives on a Tuesday. The account is frozen by Thursday. The business owner calls on Friday, after payroll has failed. The sequence is that consistent. What varies is how long the business owner waited before seeking counsel, and whether the person they initially called was equipped to do anything beyond place a phone call to the funder's servicing department. Most of the time, that call doesn’t get anything done. The funder's servicing department is not designed to resolve disputes. It is designed to collect.

A consultation costs nothing and assumes nothing; it is the beginning of a determination.