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Florida Court Rules Merchant Cash Advance Not Subject to Usury Law

In January 2021, a Florida appellate court confirmed that an MCA agreement is not a “disguised loan,” but rather a purchase and sale agreement not subject to Florida’s criminal usury statute. 

The ruling brings much needed clarity to the treatment of cash advance transactions under Florida law and clearly comes down on the side of merchant cash providers. 

Given the fact the courts are generally inclined to uphold MCAs are purchase and sale transactions, it takes a skilled debt relief specialist to help you get out of a merchant cash advance.

The Backdrop

In Craton Entertainment, LLC v. Merchant Capital Group, LLC, Florida’s Third District Court of Appeals held that an MCA purchase and sale agreement was not a loan, and therefore not subject to the state’s usury law. 

In 2016, Merchant Capital sued Craton after defaulting on an MCA agreement. Craton argued that the agreement was a “disguised loan” and that Merchant Capital violated Florida’s usury law. The trial court ruled in favor of Merchant Capital, holding that the agreement was a purchase and sale of future receivables subject to a reconciliation provision, not a loan subject to the state’s usury laws. 

Craton appealed to the Third District, arguing the agreement contained all of the characteristics of a loan, such as:

  • Subjecting the business to a credit check
  • The lack of a “forgiveness” provision in the agreement 
  • The security interest the provider took in Craton’s assets
  • The personal guarantee signed by Craton’s owner

However, Merchant Capital argued that (1) the agreement clearly stated that the parties contemplated a buy-sell agreement and (2) the agreement was not a loan because the provider did not have the absolute right to demand repayment. Instead, Merchant Capital’s ability to obtain any payments from Craton was conditioned on its ability to earn revenue. 

In short, the appellate court affirmed the trial court’s ruling, holding that the purchase and sale agreement was not a loan because the repayment obligation is not absolute and a portion of the funder’s investment is at risk. 

The Takeaway

Business owners who rely on merchant cash advances (MCAs) should know that these alternative funding products are considered purchase and sale agreements and not loans. Therefore, MCAs are generally not subject to state usury laws. The Merchant Capital decision could potentially reduce future claims over MCAs as the underlying lawsuit involved several commonly litigated issues. In any event, small businesses should carefully review the terms of an MCA agreement and understand their obligations under the reconciliation provision. 

If you are at risk of defaulting on a merchant cash advance, it takes a skilled debt relief specialist to protect your interests and your livelihood. To learn how can help, contact our office today or complete the convenient intake form.