FAQs on Usury Law: What It Means to MCA Holders?
- McDONNELL HOPKINS
- Dec 15, 2025
- 3 min read
Updated: Jan 17
McDONNELL HOPKINS - MCA News Desk Author: Paddy "The Pill" McDonnell
Usury laws are designed to limit excessive interest rates on loans. Merchant Cash Advances (MCAs), however, are typically structured as purchases of future receivables not loans placing them in a gray area that has become the focus of increasing judicial scrutiny. For MCA holders, understanding how usury law applies (and when it might) is essential to assessing risk, enforceability, and exposure. Below are answers to frequently asked questions.
1. What is usury?
Usury refers to charging interest on a loan at a rate that exceeds the maximum allowed by law. Each state sets its own usury thresholds, which may include:
Civil usury limits
Criminal usury limits
Exemptions for certain commercial transactions
Usury laws apply only to loans or forbearances of money not to true sales or purchases.
2. Why do MCA holders believe usury laws don’t apply to them?
MCAs are typically labeled as receivables purchases, not loans. Under this structure:
There is no stated interest rate
Repayment is theoretically contingent on business performance
The funder assumes risk if revenues decline
Because usury applies only to loans, MCA holders often take the position that usury laws are inapplicable.
3. Why are courts examining MCAs under usury laws?
Courts do not rely on labels alone. Instead, they apply a substance-over-form analysis, examining whether the agreement functions like a loan in practice.
Courts frequently assess:
Whether repayment is fixed or guaranteed
Whether reconciliation provisions are meaningful
Whether the funder assumes real risk
Whether default provisions effectively eliminate contingency
If repayment is effectively assured, the transaction may be recharacterized as a loan.
4. What factors increase usury risk for MCA holders?
Common red flags include:
Fixed daily or weekly remittance amounts
Illusory or obstructed reconciliation rights
Accelerated repayment upon minor technical defaults
Personal guaranties tied to payment failure rather than misconduct
Remedies that guarantee full repayment regardless of revenue
The more the agreement resembles a traditional loan, the greater the usury exposure.
5. How do courts calculate “interest” in an MCA?
If an MCA is recharacterized as a loan, courts may:
Impute an interest rate based on total repayment vs. funds advanced
Consider the repayment period and frequency
Annualize the effective cost of capital
In some cases, the resulting rate far exceeds statutory limits.
6. What happens if an MCA is found to be usurious?
Consequences vary by jurisdiction and may include:
Voiding of interest obligations
Limitation of recoverable amounts
Dismissal of enforcement actions
In extreme cases, voiding of the entire agreement
Criminal usury findings carry additional legal exposure in certain states.
7. Are all states the same when it comes to usury?
No. Usury laws differ significantly by state.
Key variations include:
Different rate thresholds
Different treatment of commercial transactions
Different remedies and penalties
Different standards for recharacterization
Choice-of-law provisions may not always control if public policy is implicated.
8. Does calling something “non-recourse” eliminate usury risk?
Not necessarily.
Courts examine whether non-recourse language is real or merely cosmetic. If enforcement mechanisms ensure repayment regardless of revenue, non-recourse labeling may carry little weight.
9. Can MCA holders avoid usury risk altogether?
Risk mitigation may include:
Structuring truly contingent repayment mechanisms
Ensuring meaningful reconciliation rights
Avoiding guarantees tied solely to payment failure
Aligning enforcement provisions with revenue performance
Even then, enforceability depends on facts, jurisdiction, and judicial interpretation.
10. Why are forensic reviews increasingly important?
As litigation and regulatory scrutiny increase, MCA holders face greater exposure from:
Contractual inconsistencies
Aggressive enforcement practices
Evolving case law
Forensic analysis helps identify how agreements may be viewed by courts and regulators before disputes escalate.
Final Thoughts
Usury law remains one of the most significant and misunderstood risk areas for MCA holders. While MCAs are not inherently unlawful, agreements that operate like loans in practice may fall squarely within usury statutes. Understanding where a transaction falls on that spectrum is no longer optional it is essential.
This article is for informational purposes only and does not constitute legal advice.