Merchant cash advance (MCA) lending has become a disruptive force in the alternative finance sector, reshaping how small and mid‑sized businesses access capital — and how lenders assess and protect their positions. In a July 29 webinar hosted by SFNet, "Strategies to Overcome MCA Challenges," three leading experts — Richard Simon, partner, Mandelbaum Barrett PC, Marc Mellman, managing director, MCA Stacking Solutions and Stuart Wells, counsel, White and Williams LLP — shared insights on the growth of MCAs, the risks they present, regulatory changes, litigation strategies, and how both lenders and merchants can handle this challenging environment.

Regardless of new disclosure laws, court actions, and regulatory changes, borrower education is paramount. Simple, transparent presentations of loan cost and terms could help merchants avoid spiraling into unsustainable debt arrangements. Vigilant underwriting, rapid crisis response, legal innovation, and persistent borrower education are essential tools for all players in the complex, rapidly evolving world of merchant cash advance finance.     

The Disruptive Rise of MCA Lending

Moderator Richard Simon opened with a candid assessment of MCAs’ impact:

“The rise of MCA lending has been one of the most disruptive developments in the alternative finance space over the last several years,” Simon said. “While MCAs may have provided vital liquidity to certain businesses that might otherwise be locked out of traditional financing, its rapid growth has created a host of complex challenges, especially for traditional and ABL lenders, fintechs, banks, and credit underwriters underwriting deals without seeing off‑balance‑sheet loan transactions as MCAs.”

Estimates vary, but panelists placed the current MCA market anywhere from $12–15 billion up to $19.7 billion annually, with projections reaching $35 billion within five years. Simon emphasized that the absence of standardized reporting means no one knows the exact size of the market, or the proportion of MCA borrowing driven by strategic financing versus last‑ditch desperation.

Good Versus Bad MCAs

A typical situation that could lead to using an MCA is a merchant having an obligation, either expected or unexpected, that they don’t have the cash flow to meet. They go online and get funding from an MCA. Ideally, they would inform their senior lender why they did it.

Mellman explained that the difference between a “good” and “bad” MCA company lies less in the contract language and more in the attitude toward problem resolution.

“In my experience, I define good versus bad in the MCA industry as to those companies who take a very practical approach to working out debt problems with their merchant borrowers… but still there are very good MCAs out there for purposes of being able to negotiate with the merchant and work out payment plans that may be different than the contract itself.”

He acknowledged that many MCA agreements, if converted to annual percentage rates, exceed 100% APR — with some disclaimers revealing figures as high as 922%. Yet, responsible MCA providers will adjust payment terms when businesses face temporary setbacks, while predatory ones refuse any modification and compound trouble with legal fee demands.

Wells added that one category of “good” MCAs are those that collaborate with a merchant’s first‑lien lender to provide short‑term “gap” financing:

“That’s beneficial to everybody,” Wells said. “I think there are MCA companies out there who, on the origination side in the first instance, will try and work with the first‑lien lenders to fill that gap. I don't see it being a working capital component. I think, by definition, the MCA companies are short term loans to solve a short-term problem.”

Hidden Debt and How to Detect It

One obstacle lenders and regulators face is that merchants often do not disclose new MCA debt to their primary lenders. Sometimes they reveal it later; other times, they keep it hidden until discovered through due diligence.

Panelists discussed detection strategies including:

• Regularly reviewing bank statements for unexplained recurring debits, whether monthly or quarterly, and supplementing these with field audits for larger facilities.

• Recognizing that there are debit transactions within those bank statements reflect the existence of a merchant cash advance draw.
• Running periodic UCC‑1 lien search updates on its portfolio. It may come across a UCC being filed anonymously but they can determine that that UCC is related to a Merchant Cash Advance company.
• Watching for sudden drops in deposits (possibly due to MCA‑directed diversion accounts)
• Monitoring for levy notices or judgments in favor of MCA companies
• Listening to borrower disclosures when cash flow collapses

“Keep control of communication,” Wells added. “Always communicate with your borrower, always have an understanding of the relationship, their needs, and what's going on. Because if they have confidence in you, they can reach out to you.”

Mellman recounted a standout case in which a $20 million‑facility client was discovered to have $6.5 million in MCA debt. The factor backed him as he negotiated with all of the MCA providers over a year, settling at 25 cents on the dollar. The merchant not only survived, but improved performance a year later.

“The factor was thrilled,” Mellman said. “The company stayed in business, and a year later they were actually doing better financially than they had been a year before… but that’s a rare circumstance.”

Regulation: Disclosure and Direct Restrictions

Wells stated that ten states now have some form of commercial finance disclosure laws, with New York and California having the most comprehensive requirements. Other states, such as Virginia, have limited their disclosures to MCA companies.  (Editor’s Note: SFNet members can access disclosure law guides published by SFNet for NY, CA, FL and GA).

“It appears that the push for disclosure laws has slowed,” Wells said. “In the last 18 months or so there have been five or six states that have proposed various forms of commercial financing disclosure laws, and it appears that most, if not all, of those bills, have died in committee.

“For existing commercial financing laws, I am not aware of any enforcement action taken in California, New York, or any other states with disclosure laws. While they placed an onerous burden on the industry, and particularly factors, ABL lenders, and non-banks, there doesn't seem to have been any enforcement activity over the past several years that those laws have been in effect..”

Meanwhile, some states are pursuing more restrictive measures. North Dakota has amended its usury laws to potentially include MCAs. Texas has effectively outlawed them by prohibiting ACH withdrawals unless the MCA has a first‑lien deposit account — something banks rarely grant.

Legal Trends: Reclassification and Usury

Courts in several jurisdictions are increasingly willing to reclassify MCAs as loans when the facts show they operate as such, subjecting them to usury laws and potential unenforceability. There are 26 states in the United States that have usury laws. More sophisticated and larger MCA companies have begun issuing new contracts, not their traditional merchant cash advance contract, which is a purchase of future receivables, but a loan agreement at what would otherwise be a usurious rate of interest in a non-usury state.

Mellman explained that MCA providers are adapting. “One of the states that you see quite often is Utah, which doesn’t have usury law. You have contracts being written under Utah law by the New York metro Merchant Cash Advance company… lending money through a bank affiliated [with a] Utah bank. That is the greatest trend that I've seen in the past couple of years, and I'm seeing it more.  I’ll get a new client, and lo and behold, I'm no longer looking at an MCA contract for a New York company. I'm looking at the New York company that is piggybacking off of a Utah bank, and it's a loan agreement at a high rate of interest.”

Although these agreements list a Utah bank as the lender, in practice the MCA company remains the decisionmaker and negotiator.

Relief Before Default

MCA companies often have the ability to adapt quickly, Wells said, explaining that when a decision comes down that is adverse, the MCA company can change the wording of their agreements to address the decision.

“The problem will always come down to whether or not the MCA companies are abiding by the terms of their agreements and the decisions that question whether or not they're a true sale or a loan. Still, contractual survival depends largely on whether the MCA’s actions truly shift risk onto itself, as claimed.”

When merchants struggle to keep up, early communication is critical. 

“Do MCAs actually expect to be paid one hundred percent of what their contract calls for?” Mellman asked. “In my experience, the answer is no.  So, understanding that they want to be paid, they would much rather have their merchant come to them before default and say, ‘I'm having cash flow problems; I need relief and a reduced payment plan.’  Typically, the MCA will accommodate their merchant and do it in 30-day cycles because the MCAs are funded by investors who have deep pockets.”

Most MCA providers funded by investor tranches report monthly, so they may grant 30‑day reduced payment cycles to keep cash flowing. Outliers, however, demand 100% recovery plus extra fees. 

Wells suggested invoking reconciliation clauses to recoup overpayments, but Mellman warned they can backfire if underpayments are revealed.

The Perils of Stacking

Stacking — layering multiple MCA agreements — is a fast track to insolvency. Mellman likened it to “falling down a rabbit hole,” citing clients with up to 16 concurrent MCAs totaling $8–9 million. Wells described informal “club” arrangements among certain MCA companies that pass merchants between them for repeat commissions.

“There are other MCA companies that openly advertise taking second, third and fourth positions,” Wells said. “In the heyday, Yellowstone Capital lthere was one MCA that was famous for that. They always took a second lien position because they didn't want to do the due diligence on the credit, so they figured if somebody else is lent to them, and there's a payment history we can lend to them as well, or we can advance fund to them as well.

“In many instances you actually have MCA companies who are friendly among themselves, and they have passed around the merchant to each other between various companies in order to earn commissions on the refinancing or replacing of one MCA with another. In those instances, usually they decide amongst themselves which one is going to make the money on the deal, and they will pay him back on the next deal. It's more of a club.”

Crisis Scenarios: Lender Response

The webinar also discussed how lenders should respond when MCA actions threaten a borrower’s operation:

• Account sweep: Decide quickly on over‑advances, declare default, issue reservation of rights and cease‑and‑desist notices, and negotiate or litigate as needed.
• Frozen lockbox: Act swiftly to pressure the MCA into withdrawing its lien notice.
• Levy on confession of judgment: Know state law—New York does not treat a loan balance as property subject to execution.
• Partial settlements: Sometimes, paying part of the MCA’s claim can free essential working capital.

Where corporate borrowers cannot bring affirmative usury claims in New York, Wells recommends civil RICO suits alleging unlawful debt collection or UCC claims for bad‑faith misrepresentation to account debtors. These tactics can put MCA companies on the defensive even in restrictive jurisdictions.

Education as the Long‑Term Solution

Simon closed the webinar with an appeal for borrower education.

“Let them see in simple math what they’re paying. Let them see in simple language what the terms of the agreement are… Where, if they truly went before an existing lender of theirs or found somebody higher up on the food chain than an MCA and give thought to collateral and creative ways to do the financing… they may be saved from the consequences of the first transaction.”

He argued that while true desperation will still push some into MCAs, many could avoid destructive stacking if they first sought less costly options, even if that meant waiting a week for funding.

Through proactive strategies, open communication, assertive legal tactics, and plain‑language borrower education, merchants and lenders can navigate — and in some cases even leverage — the realities of MCA financing without falling victim to its worst abuses.

This article was written with the help of Perplexity.