Is Your MCA Agreement Enforceable? Red Flags in Predatory Contracts
Merchant Cash Advances (MCAs) offer a quick influx of capital to small businesses, often appealing when banks say no. But these agreements come with hidden dangers. If you’re questioning whether your MCA contract is enforceable, you’re not alone. Many business owners find themselves trapped in agreements they didn’t fully understand, facing aggressive collection tactics and legal uncertainty.
This article breaks down what makes an MCA contract legally questionable, how to recognize red flags, and what you can do if you believe your agreement crosses the line.
The Problem: Small Businesses Are Targets for Aggressive MCA Lenders
MCA lenders often pitch themselves as faster and more flexible than traditional banks. In reality, they often operate in a legal gray area, using high-interest advances disguised as “sales” of future receivables.
The problem? These agreements frequently:
- Skirt state usury laws by not classifying themselves as loans;
- Include confusing or misleading language;
- Lock businesses into daily or weekly withdrawals that harm cash flow; and
- Threaten confessions of judgment (COJs) and asset freezes.
Many businesses don’t know they’ve signed something so restrictive until it’s too late.
Understanding What an MCA Really Is
Unlike a traditional loan, an MCA is structured as a purchase of future receivables. The business agrees to “sell” a portion of its future credit card or daily revenue in exchange for a lump-sum payment.
This structure allows lenders to argue that:
- The transaction is not subject to lending laws;
- There is no interest rate; and
- There is no fixed repayment schedule.
However, courts are increasingly scrutinizing these claims. If the agreement has loan-like features (fixed payments, high effective interest rates, or penalties for default), it may be considered a loan in disguise.
What Makes an MCA Agreement Unenforceable?
Not every MCA contract is legally binding. Courts may invalidate or restrict enforcement of these contracts if they contain any of the following:
1. Confession of Judgment Clauses
A confession of judgment (COJ) allows the lender to obtain a judgment against you without notice or a trial. These clauses are banned or restricted in many states due to their potential for abuse. If your MCA includes a COJ and you operate in a state where it’s not permitted, the clause might not hold up in court.
2. Fixed Daily or Weekly Payments
True MCAs are based on a percentage of your revenue. If your contract requires you to pay the same amount regardless of business performance, it may function more like a loan. Courts have flagged this issue as a sign the agreement is misrepresented.
3. Excessive Interest (Disguised as Fees)
Even if labeled as a “purchase,” if the effective interest rate is outrageous—often 60% to 200%—a judge may determine the agreement violates state usury laws. The lender’s terminology doesn’t shield them from scrutiny.
4. Personal Guarantees and Asset Seizure Threats
Some MCA contracts include personal guarantees or clauses allowing immediate seizure of assets. These provisions can be challenged if they appear unconscionable or were obtained through deceptive practices.
Real-World Example: A California Business Fights Back
A small marketing firm in Los Angeles signed an MCA agreement during a rough quarter. The contract included a confession of judgment, fixed daily payments, and a 150% repayment requirement within six months. When revenue dropped and payments bounced, the lender froze the business bank account without court approval.
With the help of legal counsel, the business challenged the validity of the COJ and argued that the MCA functioned as a usurious loan. The court sided with the business, declaring the COJ unenforceable and freezing further withdrawals. This case echoes judicial reasoning seen in LG Funding, LLC v. United Senior Properties of Olathe, LLC, 181 A.D.3d 664, 122 N.Y.S.3d 309 (2d Dept 2020), where the Appellate Division of the Supreme Court of New York questioned whether an MCA was truly a receivables purchase or a loan disguised to avoid criminal usury laws. However, whether MCAs are usurious under particular circumstances is complicated. See, for example, Principis Capital v. I Do Inc., 201 A.D.3d 752, 160 N.Y.S.3d 325 (2d Dept 2022), where a later New York court distinguished the facts in that case from those in LG Funding, LLC v. United Senior Properties of Olathe, LLC.
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Legal Trends: Courts and Lawmakers Are Cracking Down
In recent years, regulatory scrutiny of MCA lenders has increased. Regulatory authorities in New York, California, and other jurisdictions have:
- Restricted COJ usage;
- Required clearer disclosure of terms; and
- Investigated aggressive collections.
Federal agencies like the FTC and CFPB have also warned MCA lenders against deceptive practices. These legal shifts give businesses more leverage to fight back.
What Should You Do If You Suspect a Predatory MCA Contract?
1. Review the Agreement with a Lawyer
Have a business attorney examine the contract. Look for red flags such as fixed payments, aggressive collection clauses, or language inconsistent with a true “purchase.”
2. Document Every Communication
Keep a paper trail. This includes emails, texts, phone call notes, and payment records. If you challenge the agreement, this documentation can support your case.
3. Don’t Ignore Legal Notices
If the lender files a COJ or seeks payment through court, don’t delay in responding. Even if you think the contract is unfair, failing to respond can limit your legal options.
4. Consider Litigation or Settlement Negotiation
Many businesses are surprised to learn they have valid defenses. A skilled lawyer can negotiate more favorable terms or file a lawsuit to contest the agreement’s enforceability.
Conclusion: Don’t Assume the MCA Contract Is Ironclad
Just because you signed a Merchant Cash Advance contract doesn’t mean it’s unbreakable. Courts are increasingly willing to look past the form and examine the substance. If the agreement acts like a loan, charges predatory fees, or uses tactics that silence your defense, it may not stand up to legal scrutiny.
Understanding your rights is the first step to reclaiming control. If you believe your MCA contract contains unfair terms, speak with a legal professional to explore your options.
FAQ: MCA Contract Legal Questions
- Can an MCA lender freeze my business account?
Possibly, but only under certain conditions. If the lender uses a COJ or obtains a court order, they may freeze funds. But without proper legal process, this can be challenged. - Are Merchant Cash Advances legal in California?
They are not illegal, but they must follow fair business practices. Courts have invalidated MCA contracts that function as disguised loans violating state lending laws. - What happens if I can’t make daily payments?
Missed payments may trigger aggressive action, including bank account levies or lawsuits. If your payments are fixed and not based on actual revenue, the contract may be suspect. - How do I get out of a predatory MCA contract?
Legal counsel can help you explore defenses such as usury violations, misrepresentation, or unconscionable terms. Settlement or litigation may be options. - What is a confession of judgment, and why is it risky?
It’s a contract clause that waives your right to contest a lender’s lawsuit. It allows them to win a judgment without trial, often resulting in surprise asset freezes. - Can I sue an MCA lender for deceptive practices?
Yes. If the lender misrepresented terms, used illegal collection methods, or structured the agreement to avoid legal protections, you may have grounds for a lawsuit. - Who can help me fight an unfair MCA contract?
An experienced business litigation attorney familiar with state and federal lending laws can review your case and guide you through your legal options.