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%. If the rate exceeds 16% (civil usury) or 25% (criminal usury), the consequences for the funder are severe.

Civil vs. Criminal Usury

Under civil usury, the borrower can void the interest charges. Under criminal usury (rates above 25%), New York courts have held that the entire agreement is void and unenforceable. This means the borrower may owe nothing, including the original principal. Criminal usury is a complete defense that eliminates the funder’s ability to collect.

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.