Business owners who find themselves buried under Merchant Cash Advance (MCA) agreements often feel like there’s no way out. At Delancey Street, we understand how toxic these high-cost, daily-withdrawal obligations can be, especially in New York City—where Confessions of Judgment are routinely used to secure near-instant judgments against small businesses. Below is a comprehensive look at the issues business owners face, and how our team focuses on creative defense strategies that are designed to help.
Understanding the MCA vs. Traditional Loan Distinction
Before diving into potential legal defenses, it’s crucial to identify whether your MCA truly behaves like an advance on future receivables, or if it crosses the line into a disguised loan. In New York, if a court concludes the arrangement is really a loan, the factor rate could violate strict usury laws under General Obligations Law §5-501 and Banking Law §14-a. At Delancey Street, we often encounter clients who unknowingly agreed to terms that may exceed permissible interest rate caps. Once that occurs, it can open the door to a potent defense strategy that challenges the very nature of the MCA.
Handling Confessions of Judgment
A major reason MCAs are enforced swiftly in NYC is because of the Confession of Judgment (CPLR 3218). Many funders have borrowers sign these documents preemptively, eliminating the traditional lawsuit process. Business owners can wake up to a frozen bank account or a lien without receiving any formal notice. We regularly move to vacate these judgments if the lender filed them prematurely or if there’s evidence the contract was unconscionable. Our primary objective is to re-establish a level playing field and ensure the MCA provider follows the rules of engagement.
-The Danger of “Stacking” and Multiple MCAs
Many businesses take out multiple MCAs to juggle shortfalls in cash flow. The daily or weekly ACH withdrawals quickly balloon and crush any margin you have left. At Delancey Street, we have seen clients stuck with four or five merchant cash advances, each one draining revenue before the business can cover payroll or critical expenses. In these scenarios, the first step is dissecting each contract individually. Some may have interest that’s arguably usurious; others might include an invalid Confession of Judgment or ambiguous personal guarantee language. By pinpointing vulnerabilities in each MCA, it’s possible to negotiate from a position of strength—or in some cases, consolidate the obligations into a plan that fits your actual cash flow.
Potential Federal Consequences for MCA-Related Issues
Occasionally, a merchant cash advance matter escalates to the federal level. If the lender suspects fraudulent applications (e.g., inflated receivable numbers or doctored financials), they might allege wire fraud under 18 U.S.C. §1343. That can trigger a criminal investigation, which is entirely separate from civil litigation. Double jeopardy doesn’t shield you from facing both state and federal proceedings, because they are considered separate sovereigns. The penalties can range from steep fines to incarceration if the allegations stick. At Delancey Street, we emphasize early involvement to address these issues head-on. Showing good faith in the data you provided—or raising flaws in the funder’s allegations—can mean the difference between a manageable civil dispute and life-altering criminal liability.
Legal Defenses in Action: Scenarios and Strategies
Every MCA dispute is unique. One scenario might involve a personal guarantee that tries to hold you individually responsible. Another may revolve around unclear contract terms regarding “receivables purchased,” which can trigger confusion about the amount owed. Here are some common defenses we employ:
- Usury
When the repayment structure mirrors a loan rather than a true revenue-based product, we can argue the MCA violates interest rate caps. If the court agrees, the MCA can be deemed unenforceable. - Breach of Contract by the Funder
Sometimes the MCA provider fails to deliver the full advance, or improperly accelerates the payment schedule. This can form a basis to challenge their entire claim. - Improper Service or Filing of the Confession of Judgment
If the plaintiff never provided proper notice, or filed the judgment before the terms allowed, we can move to vacate. - Fraud and Misrepresentation
In some cases, the MCA provider might have used high-pressure tactics or misrepresented the nature of the deal. If that rises to a material misrepresentation, it can weaken their claim. - Lack of Standing or Assignment Defects
If the MCA was sold or assigned to another party, that new party might not have proper legal standing unless all transfer requirements were met.
Here’s a simplified table showing common MCA issues and possible defensive angles:
-| MCA-Related Issue | Possible Defense Approach |
|---|---|
| Loan disguised as MCA (usury concern) | Argue interest rate surpasses statutory caps |
| Confession of Judgment enforced early | File motion to vacate for procedural deficiencies |
| Personal guarantees for owners | Challenge ambiguous or overreaching contract language |
| Fraud allegations (state or federal) | Show absence of intent or reliance on lender’s promises |
Stepping into Litigation vs. Settlement
At Delancey Street, we often find that a proactive approach encourages MCAs to negotiate. Many lenders don’t want the hassle and risk of prolonged litigation, especially if they sense the defendant has strong defenses. A negotiated resolution can extend repayment terms, lower the total owed, or remove personal liability. Still, there are times when litigation is inevitable—particularly if the MCA provider refuses any compromise or tries to push for an expedited judgment. In those cases, we draw on a deep understanding of New York procedure and federal law to protect your business at every stage.
Personal Guarantees and Asset Protection
Another major concern is personal liability. Business owners are often terrified they’ll lose their family home or other personal assets. MCA providers typically insert personal guarantee clauses that can accelerate collection efforts. In some circumstances, that guarantee might not be enforceable—particularly if it was procured by deceptive means or lacks key details. Our goal is to keep the dispute within the confines of the corporate entity and limit the impact on your personal finances.
When Bankruptcy or Other Options Arise
Some businesses reach a point where restructuring under Chapter 11 is the only way forward. If the debts are too high, and the daily MCA debits make it impossible to operate, a court-supervised reorganization might be your best option. At Delancey Street we assess these scenarios carefully. Sometimes, an out-of-court settlement is preferable and faster. Other times, a controlled bankruptcy filing can deal with the MCA—plus other creditors—in one unified proceeding.
Avoiding Criminal Exposure
A few MCA disputes involve allegations of forged signatures, false representations in loan applications, or even check kiting. That’s when it’s critical to consider whether the matter could escalate into a criminal probe. Having an attorney who understands both civil and criminal systems is key. Our experience is that many accusations of fraud lack real support. A deep review of emails, text messages, and transactional records often shows that the funder was aware of the business’s financial picture all along.
Bottom Line: There Is a Path Forward
At Delancey Street, we have seen how merchant cash advances can become a crushing burden. We also know there are ways to fight back—whether by asserting usury, vacating an improperly obtained judgment, or negotiating a settlement that stretches out the payments. Each business situation is unique, and every MCA must be dissected to identify hidden landmines. The important part is taking action quickly. Once a confession is filed and your accounts are frozen, it’s far harder to maintain daily operations.
-