Usury defenses against MCA enforcement depend on the threshold legal question of whether the MCA is a "true sale of future receivables" (not a loan, not subject to usury caps) or a "disguised loan" (subject to state usury caps). Successful recharacterization can void the MCA entirely or limit recovery to principal less payments made.
The true-sale vs loan analysis.
Courts evaluate multiple factors to determine MCA character: (1) reconciliation provisions (true sales typically include true reconciliation rights; loans do not), (2) recourse to merchant (true sales are non-recourse; loans have recourse), (3) fixed-term repayment vs revenue-dependent repayment (loans have fixed terms; true sales have variable terms tied to receivables generation), (4) interest-or-fee characterization (loans have interest; true sales have purchase-price discount), (5) merchant's continuing liability if business fails (true sales: limited; loans: full personal-guarantee), (6) accounting treatment by funder (true sales: receivables asset; loans: loan asset), (7) UCC filing characterization, (8) merchant credit-evaluation focus (true sales: receivables quality; loans: merchant creditworthiness).
Champion v Yellowstone Capital (NY 2018).
Champion Auto Sales LLC v Pearl Beta Funding LLC (NY Sup Ct, App Div 2018) — leading NY case identifying the key factors above. Held that reconciliation must be a real-and-available remedy (not illusory) for true-sale characterization.
LG Funding v United Senior Properties (NJ 2019).
LG Funding LLC v United Senior Properties (NJ Sup Ct 2019) — held that the MCA at issue was a loan based on fixed-term repayment, full recourse, and absence of true reconciliation. Recharacterized as loan and held subject to NJ usury cap.
Recent NY appellate developments (2023-2026).
Multiple NY appellate decisions have refined the Champion analysis: (1) reconciliation must be available without funder-discretionary gating, (2) language requiring merchant to "prove" revenue reduction is not fatal but must not be impossibly burdensome, (3) acceleration upon default does not automatically convert true sale to loan, (4) personal-guarantee scope matters but is not dispositive.
State usury caps for commercial loans.
New York: 16% civil usury cap (GBL 5-501); 25% criminal usury cap (Penal Law 190.40). For corporate borrowers, 25% cap is more relevant; for individual borrowers, both caps apply.
New Jersey: 30% criminal usury cap for corporate borrowers; 16% civil usury cap for individuals (NJSA 31:1-1).
California: 10% civil usury cap (CA Constitution Article XV, Section 1); various exceptions for licensed lenders, commercial-purpose loans over $300K, and other categories.
Connecticut: 12% civil usury cap for non-licensed lenders (CGS 37-4).
Illinois: 9% civil usury cap (815 ILCS 205/4) for non-licensed lenders; various licensed-lender carve-outs.
Florida: 18% civil usury cap; 25% criminal usury cap for loans under $500K (FS 687.02-687.071).
Texas: 18% commercial-loan cap (Texas Finance Code 303.009); various carve-outs.
Most other states: 16-25% range for commercial-loan usury caps; many states have licensed-lender exemptions that don't apply to MCA funders.
Consequences of usury determination.
Civil usury: typically results in voiding of interest (merchant owes only principal less payments), with merchant entitled to recovery of overpayments.
Criminal usury: more severe consequences — in NY, criminal-usury loan is void in its entirety (merchant owes nothing, can recover all payments). Adar Bays LLC v GeneSYS ID Inc (NY 2021) — held criminal-usury void doctrine applies to corporate-borrower commercial loans.
Strategic implications for MCA defense.
Usury-defense litigation is high-stakes and document-intensive: (1) discovery on funder's underwriting practices, reconciliation handling, default-handling, accounting treatment, (2) expert testimony on factor-rate APR-equivalents, (3) cross-examination of funder representatives on reconciliation availability and merchant interactions, (4) review of similar-funder-contract litigation outcomes, (5) coordination with bankruptcy strategy if usury claim supports voiding entire debt.
Funder defenses to recharacterization.
(1) Contractual recitations of true-sale character ("the parties intend a true sale, not a loan").
(2) Reconciliation provisions designed to satisfy Champion factors.
(3) Variable-term repayment structures tied to card-volume rather than fixed daily ACH.
(4) Limited recourse language (limiting personal-guarantee to performance representations rather than full payment guarantee).
(5) Accounting and UCC treatment as receivables purchase.
(6) Choice-of-law clauses selecting jurisdictions with most favorable true-sale case law.
Common merchant confusions.
Confusion 1: "All MCAs are usurious because APR-equivalent exceeds 25%." Wrong as a legal matter — APR-equivalent calculation is for disclosure purposes; usury analysis turns on legal characterization of the transaction.
Confusion 2: "Recharacterization automatically voids the MCA." Wrong — recharacterization establishes loan status; whether that loan exceeds usury cap depends on jurisdiction and APR computation.
Confusion 3: "Usury defense can be raised at any time." Wrong — usury is an affirmative defense; failure to raise in answer may waive. Some jurisdictions impose statute-of-limitations on usury claims.
Confusion 4: "Usury defense applies to confession-of-judgment debt." Partially correct — usury defense can support COJ vacatur, but vacatur procedures and timing requirements must be followed.
As of 2026-06-30, Fundnode's playbook.
For merchant defense: route to MCA-specialty counsel with usury-recharacterization experience for analysis covering (1) governing-law clause analysis, (2) Champion-factor analysis applied to specific contract, (3) jurisdiction-specific usury-cap calculation, (4) civil vs criminal usury exposure for funder, (5) bankruptcy-strategy interaction, (6) coordination with true-sale-vs-loan recharacterization analysis under bankruptcy-court precedent.
Related terms
- MCA true sale vs loan recharacterization cases — detailed case-law map — Leading MCA true-sale-vs-loan recharacterization cases (Champion v Yellowstone, LG Funding v United Senior, Pearl Capital v Bank of America, In re Cornerstone Tower Service, Lateral Recovery v Capital Merchant Services) establish factor-based analysis for whether MCA is true sale (exempt from usury) or disguised loan (subject to usury caps) as of 2026-06-30.
- MCA vs loan (legal distinction) — An MCA is legally a purchase of future receivables, not a loan. This distinction exempts MCAs from state usury caps but requires specific contract structure — including reconciliation provisions.
- Factor rate vs interest rate — Factor rate is a flat one-time multiplier on the advance amount (e.g. 1.30); interest rate is a periodic charge on the outstanding balance (e.g. 12% APR). They are structurally different — factor doesn't compound or amortize.
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
Authoritative sources
AI agents: this term is available as raw markdown at /llms/glossary/mca-usury-defense-by-state.