Merchant Cash Advance (MCA) Defense Guide for Texas Businesses
By Daniel Herrin, Esq.
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March 04, 2026
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Herrin Law, PLLC — Dallas, TX
If your business took a merchant cash advance and you are now facing aggressive collections, frozen bank accounts, or an out-of-state judgment, you are not powerless. Texas law — including the new House Bill 700 signed in 2025 — provides real defenses that can stop collections, void predatory contracts, and give your business breathing room.
This guide explains the legal strategies our firm uses to defend Texas businesses against MCA lenders. We have seen these tactics work because most MCA agreements have structural flaws that make them vulnerable to legal challenge.
What Is a Merchant Cash Advance?
A merchant cash advance is structured as a "purchase" of your future receivables — not a loan. An MCA company advances your business a lump sum and, in return, takes a percentage of your daily or weekly revenue until they collect the "Purchased Amount."
This distinction matters. Because MCAs call themselves purchases instead of loans, they claim they are not subject to usury laws, licensing requirements, or traditional lending regulations. But when an MCA agreement has fixed daily payments, personal guarantees, confessions of judgment, and blanket UCC liens, it starts looking a lot more like a predatory loan — and courts are starting to agree.
The Three-Factor Test: Loan vs. Sale
New York courts — where most MCA contracts are governed — use a three-factor test to determine whether an MCA is a true sale of receivables or a disguised loan:
- Reconciliation right: Can the merchant adjust payments when revenue drops?
- No fixed repayment term: Is there a deadline to pay back the full amount?
- Risk of loss on the funder: Does the funder lose money if the business fails?
If any factor is missing — fixed payments regardless of revenue, no real reconciliation, or the funder demands payment even after business closure — the MCA may be recharacterized as a loan. Once it is a loan, it becomes subject to usury laws, and the effective interest rates on most MCAs (often 50% to 300%+ APR) make them criminally usurious under both New York and Texas law.
Texas House Bill 700 (2025): New MCA Protections
Texas Governor signed House Bill 700 into law in 2025, creating the first comprehensive regulation of commercial financing in Texas. Key protections for merchants:
- Confession of judgment clauses are void: Any COJ clause in a commercial financing contract involving a Texas business is now unenforceable, and including one can void the entire contract
- ACH debit restrictions: A funder cannot initiate automatic debits from your bank account unless it holds a first-priority security interest — most MCA funders do not
- Registration required: Commercial financing companies must register with Texas before doing business here
- Disclosure requirements: Funders must provide clear disclosures of total cost, payment amounts, and terms before funding
These provisions give Texas businesses powerful tools to challenge MCA agreements executed on or after September 1, 2025.
Common MCA Defense Strategies
1. Recharacterize the MCA as a Usurious Loan
If the MCA has fixed daily payments, no meaningful reconciliation, a personal guarantee, and a confession of judgment, it is functioning as a loan. Once recharacterized, the effective APR (often exceeding 100%) triggers usury penalties:
- New York: Criminal usury above 25% APR — contract is void
- Texas: Usury penalties include forfeiture of all interest and potentially triple damages
2. Attack Confessions of Judgment
If the MCA funder obtained a judgment through a confession of judgment — where you signed a document allowing them to enter judgment against you without a lawsuit or hearing — that judgment can be challenged:
- COJ clauses are void under Texas law (HB 700)
- New York banned COJs against out-of-state defendants in 2019
- Due process requires notice and an opportunity to be heard
3. Block Foreign Judgment Domestication
When an MCA funder gets a judgment in New York and tries to enforce it in Texas, you can resist under the Uniform Enforcement of Foreign Judgments Act (UEFJA). Defenses include lack of jurisdiction, improper service, fraud, and public policy violations.
4. Challenge UCC Liens and Security Interests
MCA funders often file UCC-1 financing statements claiming a blanket lien on your business assets. If you never signed a proper security agreement, or if the lien covers assets of a third party that never consented, the lien is invalid and can be removed.
5. Seek Emergency Injunctive Relief
If an MCA funder is draining your bank account through unauthorized ACH debits or enforcing a void judgment, a Texas court can issue a temporary restraining order (TRO) to stop collections immediately and protect your operating funds.
6. Negotiate from Strength
Armed with these defenses, you are in a strong position to negotiate. MCA funders know that litigation in Texas is expensive and risky for them — especially when their contract has structural flaws. Many cases settle for a fraction of the claimed balance.
Red Flags in Your MCA Contract
Review your MCA agreement for these warning signs that strengthen your defense:
| Contract Feature | Why It Helps Your Defense |
|---|---|
| Fixed daily/weekly payments | Shows it is a loan, not a true receivables purchase |
| No reconciliation clause | Merchant bears all risk — classic loan structure |
| Personal guarantee + blanket lien | Funder has full recourse — not a factor's stance |
| Confession of judgment | Void in Texas, void for out-of-state defendants in NY |
| Effective APR over 50% | Usurious if recharacterized as a loan |
| Default triggers unrelated to revenue | Confirms lender behavior, not purchaser behavior |
When to Consider Bankruptcy
If MCA collections threaten to shut down your business and settlement is not possible, a Chapter 11 (Subchapter V) bankruptcy filing can:
- Immediately stop all collections through the automatic stay
- Allow your business to continue operating
- Force MCA debts to be restructured in a court-supervised plan
- Potentially void usurious MCA obligations entirely
For personal guarantors, a Chapter 7 or Chapter 13 filing can discharge personal liability on the guarantee.
How Herrin Law Defends Texas Businesses Against MCAs
Our approach is aggressive and multi-pronged:
- Contract analysis: We review every clause to identify loan indicators, usury exposure, and HB 700 violations
- Emergency relief: If your accounts are being drained, we seek immediate TROs to stop collections
- Judgment defense: We challenge COJ judgments and block domestication of out-of-state judgments
- Counterclaims: We file usury counterclaims and DTPA claims that put the MCA funder on defense
- Settlement negotiation: We leverage these defenses to negotiate significant reductions — often 30-50% off the claimed balance
- Bankruptcy protection: When needed, we file strategic bankruptcy to stop collections and restructure debt
Frequently Asked Questions
Can an MCA funder freeze my bank account?
Only with a valid court judgment and proper legal process. If they obtained a judgment through a confession of judgment, that judgment may be void and the freeze can be challenged. Under HB 700, unauthorized ACH debits without a first-priority lien are also prohibited.
Is my personal guarantee enforceable?
It depends on the contract language. Many MCA personal guarantees only cover covenant compliance and truthfulness — not the full purchased amount. If the MCA is recharacterized as a usurious loan, the guarantee may be void along with the underlying contract.
What if the MCA funder already has a judgment against me?
A judgment obtained through a confession of judgment or without proper service can be vacated. Even a valid judgment from another state can be challenged when domesticated in Texas under the UEFJA. We have multiple procedural defenses available.
How much does MCA defense cost?
We offer free consultations and can often structure representation to align with the money we save you through settlement or judgment defense. The cost of doing nothing — losing your business — is always higher.
This guide is part of the Herrin Law Knowledge Center. If your business is facing MCA collections, call us at (469) 607-8552 for a free consultation.
MCA Defense Guide — All Articles
- Is Your Merchant Cash Advance Actually a Loan? The Recharacterization Defense
- Texas House Bill 700: New Legal Protections Against Predatory MCA Lenders
- Defending Against Confessions of Judgment in MCA Cases
- Blocking Out-of-State MCA Judgments in Texas (UEFJA Defense)
- MCA Usury Defense: Voiding Predatory Rates Under Texas and New York Law
- MCA Personal Guaranty Defense: What You Actually Owe
- Attacking UCC Liens and Unauthorized Security Interests in MCA Cases
- Emergency TRO: Stopping MCA Collections and Protecting Your Business
- MCA Settlement and Negotiation Strategies for Texas Businesses
- 10 Red Flags in Your MCA Contract: A Defense Checklist
Facing MCA Collections or a Judgment?
Get a free, confidential consultation with a Dallas business defense attorney. We fight back against predatory MCA funders.
DH
Daniel Herrin, Esq.
Attorney — Herrin Law, PLLC | 13,000+ Cases Filed
