A merchant cash advance provides funds in exchange for a percentage of the business’s future receipts until a fixed amount is repaid. Whether the transaction is a purchase or a disguised loan has become heavily litigated.

The distinguishing factors courts examine: whether there is a reconciliation provision allowing payments to adjust with actual receipts; whether the agreement has a finite term or continues until the amount is delivered; and whether the funder has recourse if the business fails through no fault of its own. A transaction with genuine risk of non-payment resembles a purchase; one with a fixed schedule and full recourse resembles a loan.

Why it matters. If the transaction is a loan, usury limits, licensing requirements and disclosure rules may apply, and rates in this market frequently exceed statutory ceilings.

Personal guaranties in these agreements are typically limited to breach of specific covenants rather than to repayment, which supports the purchase characterization — and is often drafted broadly enough to undermine it.

Disclosure regimes. Several states now require commercial financing disclosures including an annualized rate, applying to purchases of receivables as well as loans.

Confessions of judgment were widely used in this market and have been restricted by statute and by enforcement action.