MCA Usury and Recharacterization: When an MCA Becomes a Loan

The Risk-of-Loss Test

The central question in MCA recharacterization is whether the funder bears a genuine risk of loss. A true receivables purchase means the funder accepts the risk that the business may not generate sufficient revenue. If the agreement contains mechanisms that eliminate this risk, such as personal guarantees of a fixed amount, mandatory daily payments regardless of actual receipts, or reconciliation provisions that exist on paper but are never honored in practice, courts may find the transaction is a loan.

What Happens When an MCA Is Recharacterized

Once recharacterized as a loan, the transaction becomes subject to New York’s usury statutes. The court calculates the effective annual interest rate based on the total repayment amount versus the amount advanced and the repayment period. MCA factor rates that seemed acceptable as “purchase discounts” often translate to annual interest rates well above 100%. For a corporate borrower the operative threshold is generally the 25% criminal usury rate rather than the 16% civil cap, which is ordinarily unavailable to it. Rates well past that threshold are common in these transactions, which is why the contested question is usually recharacterization rather than the arithmetic.

Civil vs. Criminal Usury

Usury analysis only comes into play if the transaction is first recharacterized as a loan rather than a purchase of receivables, and courts examine the transaction as a whole in making that determination. If an agreement is recharacterized, what follows depends on the borrower. New York’s civil usury limit is generally not available to corporate borrowers, so most business defendants are arguing criminal usury rather than civil. Choice of law provisions and the borrower’s legal status can both change the result. A finding of criminal usury can render a loan void in New York, but that is the end of a contested argument, not a starting assumption.

Building a Recharacterization Defense

Recharacterization requires careful analysis of the specific agreement terms. An attorney must identify every provision that undermines the funder’s claimed risk of loss, calculate the effective interest rate, and present the argument in a way that aligns with existing case law. This is not a generic defense but rather one that depends on the specific facts of each agreement.