The single most powerful defense against a merchant cash advance is usury. When an MCA is recharacterized as a loan, the effective interest rate — often 100% to 300% APR or higher — triggers criminal usury penalties under both New York and Texas law. The contract becomes void, and the funder may owe you money instead of the other way around.
This article explains how usury laws apply to MCAs, how to calculate the effective rate, and what penalties the funder faces.
Why Usury Applies to MCAs
MCA agreements claim to be "purchases of future receivables," not loans. By avoiding the word "loan," they claim usury laws do not apply. But courts have repeatedly held that when the economic substance of a transaction is a loan — regardless of what the contract calls it — lending laws apply.
Once an MCA is recharacterized as a loan (because of fixed payments, no meaningful reconciliation, personal guarantees, and full recourse against the merchant), the "factor rate" or "purchased amount" markup becomes interest. And that interest rate is almost always far above legal limits.
Calculating the Effective APR
To determine the usury exposure, calculate the effective Annual Percentage Rate:
Example: - Business receives $100,000 advance - Must repay $135,000 ("purchased amount") - Daily ACH payments of $750/day for approximately 180 days (6 months)
The markup is $35,000 on a $100,000 advance over 6 months — which equals approximately 70% APR. Many MCAs produce APRs well over 100%.
Some MCAs are even worse: - $50,000 advance with $67,500 payback over 4 months = ~105% APR - $75,000 advance with $112,500 payback over 5 months = ~120% APR
These rates are not even close to legal limits in any state.
New York Usury Law
Since most MCA contracts are governed by New York law, New York's usury statutes are critical:
Civil Usury (General Obligations Law §5-501)
- Maximum rate: 16% APR for most transactions
- Consequence: The usurious interest is void; borrower need not pay it
- The contract itself remains valid, but all interest above 16% is unenforceable
Criminal Usury (Penal Law §190.40)
- Maximum rate: 25% APR for any loan
- Consequence: The entire contract is void and unenforceable — not just the excess interest, but the entire obligation
- The lender cannot recover any principal, interest, or fees
- Criminal usury is a class E felony in New York
For most MCAs, the effective APR far exceeds 25%, meaning the contract is void in its entirety under criminal usury. The funder literally has no legal right to collect anything.
Texas Usury Law
If Texas law applies (or if a Texas court is evaluating the transaction):
Texas Finance Code §302.001
- Maximum rate: 18% APR for most commercial transactions (higher for certain authorized lenders)
- The Texas Constitution (Art. XVI, §11) also limits interest rates
Penalties Under Texas Finance Code §305.001
Texas usury penalties are harsh:
- Forfeiture of interest: The lender must forfeit all interest charged — reducing the obligation to just the principal advanced
- Treble damages: If the usurious interest exceeds twice the legal maximum, the borrower can recover three times the usurious interest paid
- Forfeiture of principal: If the rate is more than twice the legal limit, the lender forfeits the right to collect any principal or interest — the entire debt is voided
- Attorney's fees: The borrower recovers reasonable attorney's fees
For an MCA charging 100%+ APR against a Texas limit of 18%, the rate exceeds twice the maximum — triggering the most severe penalty: forfeiture of all principal and interest.
The Funder's Dilemma
This creates what lawyers call a "catch-22" for MCA funders:
- If the MCA is a sale of receivables: No interest, no usury — but also no right to collect the full purchased amount if the business has no receivables. Business closure is not a breach.
- If the MCA is a loan: The funder can demand repayment regardless of receivables — but the effective interest rate makes it criminally usurious, voiding the entire contract.
Either way, the funder loses. This is why usury is the most feared word in MCA litigation.
Using Usury in Settlement Negotiations
You do not need to win a usury ruling at trial to benefit from this defense. The mere threat of usury analysis transforms settlement negotiations:
Settlement Script
"Under your own contract, business closure is not a breach. You only have rights to future receivables — there are none. If you take the position this is a loan, it becomes criminally usurious under New York law. We will litigate aggressively. We will challenge any judgment in Texas. Usury, jurisdiction, and public policy defenses are all in play."
This language — grounded in the actual contract and law — puts MCA funders on the defensive. They know that: - A court finding of usury voids their contract entirely - The borrower could win money damages instead of paying - Regulatory scrutiny (from the NY Attorney General, Texas AG, or FTC) could follow - A precedent-setting ruling threatens their business model across all cases
Typical Settlement Outcomes
When usury defenses are credibly raised: - Many cases settle for 30-50% of the claimed balance - Some settle for less if the funder's contract has multiple vulnerabilities - Personal guarantees are often released as part of the settlement - Judgments are vacated by agreement - Payment plans of 12-24 months are common
Building Your Usury Case
To maximize leverage, prepare:
- Forensic APR calculation: Have your attorney or a forensic accountant compute the effective annual rate based on actual payments and timeline
- Expert witness: Consider engaging an expert on MCA practices to opine that the transaction is economically a loan
- Contract analysis: Identify every loan indicator (fixed payments, no reconciliation, PG, COJ, blanket lien)
- Payment history: Document every payment made — total payments may already exceed the original advance
- Funder communications: Any internal emails or statements treating the MCA as a loan or referring to "interest" or "repayment"
This article is part of the MCA Defense Guide. Call (469) 607-8552 for a free consultation.