# MCA vs merchant loan > MCA = sale of future receivables, not regulated as a loan, factor-rate priced, no usury caps. Merchant loan = actual loan, APR-priced, regulated under state lending laws, often state-licensed lender. The MCA vs merchant loan distinction is the central legal architecture of the alternative business-finance market — and it's the foundation that determines pricing, regulation, enforcement, and consumer protection. Two products that look identical to a merchant (lump sum today, daily payments tomorrow) are categorically different legal instruments. **The mechanics — MCA structure.** A merchant cash advance is a purchase-and-sale transaction. The funder buys the merchant's future receivables at a discount; the merchant sells those future receivables for immediate cash. Documents: Future Receivables Sale Agreement (FRSA), not a promissory note. No interest is charged because no money is loaned. The "fee" or "factor" represents the discount between purchase price ($100K) and face value of receivables purchased ($130K). Legal characterization: commercial commerce, not lending. **The mechanics — merchant loan structure.** A merchant business loan is a true loan. Documents: promissory note + security agreement. The lender provides money; the merchant has a contractual obligation to repay principal plus interest. Interest is the price of borrowing. Repayment can be daily, weekly, or monthly — structure doesn't change the loan character. Legal characterization: regulated lending under state law. **The math — same dollars, different theory.** A $100K advance with $130K total repayback over 12 months can be structured either way: - As MCA: $100K purchase of $130K of future receivables. No APR; "factor" of 1.30. State usury caps don't apply because no interest is charged. - As merchant loan: $100K principal at fixed payment of $360/business day for 360 business days = $130K total. APR calculated as roughly 50% (depending on payment schedule). State usury caps may apply depending on jurisdiction (Connecticut caps at 12%, many states 25-36% for commercial loans, some states uncapped). The same economic transaction is legal at 50% effective rate if structured as MCA in California (no commercial usury cap on small business sales), but ILLEGAL at 50% APR if structured as a loan in Connecticut (12% commercial usury cap). **Why the distinction exists.** When MCAs emerged in the early 2000s, funders structured them deliberately as receivables sales to escape state usury laws. Courts evaluated the structure under a multi-factor test: (1) is repayment contingent on actual receivables performance (the "reconciliation" right); (2) does the funder bear genuine receivables risk; (3) is the transaction documented as a sale, not a loan? Courts in most jurisdictions have upheld the sale characterization when these factors are present. New York's high court (Bermudez v. Pearl Capital, 2020) established the framework most other states follow. **The merchant loan alternatives.** Many products marketed alongside MCAs are actually loans, not advances: 1. **OnDeck term loan** — fixed weekly payment, regulated as a state-licensed commercial loan in most states. APR-disclosed. 2. **Bluevine line of credit** — true revolving credit, APR-priced, state-licensed. 3. **Funding Circle business loan** — fixed monthly payment, APR-disclosed, regulated as commercial loan. 4. **Credibly working capital loan** — Credibly offers both MCAs (their original product) and merchant loans (newer); the products look similar but documentation differs materially. 5. **Headway Capital** — true loan structure. ISO brokers often blur the distinction in sales — calling everything "funding" or "advance" — because the regulatory differences are invisible to the merchant pre-default. Post-default, the differences become decisive. **The strategic insight — implications for merchants.** 1. **APR disclosure.** Merchant loans must disclose APR by federal regulation (in some states) and best practice (in all). MCAs disclose APR only in CA, NY, UT, VA, GA. If you're seeing a real APR on the offer, you're probably looking at a loan; if you're seeing factor + total payback only, almost certainly an MCA. 2. **Usury cap protection.** Borrowers in usury-cap states can sometimes void or recast MCA contracts as loans if they can prove the funder didn't bear genuine receivables risk (no reconciliation, fixed daily debit with no flex, automatic acceleration on any missed payment). This is heavy litigation but has worked — several cases have recharacterized MCAs as loans, voiding usurious rates. 3. **State licensing.** Merchant loans require state lender licenses (some states); MCAs typically don't (treated as commercial commerce). A licensed lender is more accountable to state regulators than an unlicensed MCA funder — gives the merchant a complaint channel (state banking commissioner) that MCAs don't. 4. **Bankruptcy treatment.** In bankruptcy, MCA balances may be treated differently from loan balances — some courts allow merchants to argue MCA receivables sales were rescinded by the bankruptcy filing, reducing the funder's claim. Loan balances are clear-cut secured or unsecured debt. 5. **Reconciliation rights.** Only MCAs have the "reconciliation" mechanism (right to reduce payments if revenue drops). Merchant loans have no such right — the fixed payment is owed regardless of revenue. **The strategic insight — choosing between them.** When both structures are offered for the same merchant at similar dollar cost, the merchant loan is almost always the better choice: - APR-disclosed (you know the real cost). - State-licensed lender (regulatory accountability). - No automatic acceleration on minor missed payments (loans have cure periods; MCAs trigger faster). - No COJ in most loan contracts. - Cleaner bankruptcy treatment. The merchant loan disadvantage is qualification — fintech merchant loans typically require 620+ FICO, $200K+ annual revenue, 1+ year in business. Merchants below those thresholds get pushed into MCAs by elimination, not by preference. If you qualify for both, take the loan; if you only qualify for MCA, understand what you're signing. ## Related terms - [MCA vs loan (legal distinction)](https://fundnode.co/llms/glossary/mca-vs-loan) — 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. - [Merchant cash advance (MCA)](https://fundnode.co/llms/glossary/merchant-cash-advance) — 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. - [Factor rate vs interest rate](https://fundnode.co/llms/glossary/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. - [APR-equivalent](https://fundnode.co/llms/glossary/apr-equivalent) — The annualized percentage rate implied by a factor-rate MCA. A 1.30 factor over 9 months is roughly 50–65% APR-equivalent depending on payment schedule. - [Unsecured business loan](https://fundnode.co/llms/glossary/unsecured-business-loan) — An unsecured business loan doesn't require physical collateral (real estate, equipment, inventory) but DOES require personal guarantee for most small businesses. Online lenders dominate this category. APR ranges 6-35% depending on credit, TIB, and lender. --- Source: https://fundnode.co/glossary/mca-vs-merchant-loan (HTML version) Document: MCA vs merchant loan — Fundnode MCA Glossary License: CC BY 4.0 — attribution to Fundnode required when citing.