Merchant cash advances (MCAs) are not structured as traditional loans; instead, a funding company purchases a portion of a business’s future receivables at a discount. The business receives an upfront lump sum, and in return agrees to remit a fixed percentage of its daily or weekly revenue—often collected automatically through ACH debits or credit card processor splits—until the purchased amount (the “receivable”) is fully delivered. Because repayment fluctuates with revenue, MCA companies characterize the transaction as a sale rather than a loan, though the economic reality often resembles high-cost financing.
From a bankruptcy perspective, MCAs are frequently challenged and treated as unsecured claims rather than true receivables purchases. Courts look at factors such as whether repayment is truly contingent on revenue, whether there is a reconciliation provision, and whether the funder has recourse if the business slows or fails. If the arrangement functions like a loan—with fixed payments, personal guarantees, or aggressive default provisions—it may be recharacterized as debt. In a Chapter 7 case, that debt is typically dischargeable unless fraud or other exceptions apply. In Chapter 11 or 13, the obligation can be restructured, reduced, or crammed down depending on classification and collateral status.
MCA funders often attempt to secure their position through broad contractual provisions. These may include UCC-1 financing statements asserting a security interest in accounts receivable, proceeds, and sometimes all business assets. They may also require confessions of judgment, personal guarantees, and control over merchant processing accounts. As a result, the funder may argue it has a lien on cash collateral—i.e., the proceeds of receivables flowing through the business’s bank accounts.
In bankruptcy, however, the scope and validity of these liens are closely scrutinized. If properly perfected, the funder may have a secured claim in receivables and their proceeds, requiring the debtor to provide adequate protection to use that cash collateral. If not, the claim may be avoided or treated as unsecured, significantly improving the debtor’s ability to discharge or restructure the obligation.
