Are merchant cash advances legal?
Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners ·
Yes. Merchant cash advances are legal in all 50 US states because they are structured as a purchase of future receivables, not as loans — which means state usury caps that apply to loans generally do not apply to MCAs. That legality comes with strings attached: several states (California, New York, Virginia, Utah, Georgia, Connecticut, Florida, Kansas) now require standardized commercial financing disclosures similar to a Truth-in-Lending statement, and a 2019 New York reform sharply limited the use of out-of-state confessions of judgment.
Quick facts
- Legal in all 50 states
- Yes
- Regulated as loans?
- No — structured as receivables purchase
- Usury caps apply?
- Generally no, for true MCAs
- Disclosure laws (2023–2026)
- CA, NY, VA, UT, GA, CT, FL, KS
- Federal regulator
- FTC + CFPB (small biz data collection)
- Confessions of judgment (COJs)
- Restricted in NY (2019); varies elsewhere
The 60-second answer
A merchant cash advance is legal because it is not, in the eyes of most courts, a loan. It's a purchase and sale of a fixed dollar amount of future receivables at a discount today. That distinction matters legally because usury laws — the state caps that limit how much interest a lender can charge — apply to loans, not to purchases. Courts have consistently upheld this framing when the contract has real "reconciliation" and "no absolute obligation to repay" clauses.
Where MCAs run into trouble is when a contract behaves like a loan in every meaningful sense: no true reconciliation, guaranteed daily payment regardless of revenue, and terms that mirror a fixed amortization. Several state attorneys general and the FTC have brought enforcement actions against MCA companies that misrepresented their products or used aggressive collection practices, especially involving confessions of judgment.
The state-by-state MCA disclosure landscape
Between 2018 and 2026, eight states passed commercial financing disclosure laws. These don't outlaw MCAs; they require standardized, TILA-like disclosures — APR, total cost, prepayment terms — before signing. California's SB 1235 was first, effective 2022, and covers most small business financing under $500,000 to a California business. New York's DFS Part 600 followed in 2023 with similar requirements. Virginia, Utah, Georgia, Connecticut, Florida, and Kansas have all enacted their own versions since.
The practical effect: any legitimate funder operating in those states now provides a standardized disclosure alongside the contract. If you're offered an MCA in California, New York, or one of the other covered states and there's no disclosure document, that alone is a red flag — either the funder isn't compliant or is trying to route the deal through a different state to avoid the rule.
Confession of judgment enforcement is the other big legal story. Before 2019, out-of-state COJs were routinely enforced in New York courts and became a signature MCA collection tool. A 2019 amendment restricted enforcement of COJs against out-of-state defendants — meaning a Texas business can no longer have a NY-court judgment converted to enforcement without going through normal service. COJs are still valid for NY-based businesses that signed NY-governed contracts.
MCA legal framework at a glance
| Option | When to use | Watch out for |
|---|---|---|
| Federal level | MCAs are not covered by TILA or Reg Z | FTC + CFPB can still act on unfair or deceptive practices |
| State usury caps | Generally do not apply to true MCAs | Courts will recharacterize as loans if contract is a sham |
| State disclosure laws | CA, NY, VA, UT, GA, CT, FL, KS require standardized disclosures | Missing disclosure = red flag on the funder |
| Confessions of judgment | Still valid in NY for NY businesses; barred out-of-state (2019) | Read the venue and choice-of-law clauses carefully |
| Personal guarantee | Present on nearly every MCA — legal in all states | Enforceable against personal assets after judgment |
Frequently asked questions
Are merchant cash advances legal in California?
Yes, and they are also covered by SB 1235, California's commercial financing disclosure law. Any funder offering an MCA to a California business must provide a standardized disclosure document (APR, total cost, prepayment terms) before you sign.
Are merchant cash advances legal in New York?
Yes. New York DFS Part 600 requires commercial financing disclosures for most MCAs offered to NY businesses. Separately, a 2019 amendment restricted enforcement of NY-court confessions of judgment against out-of-state defendants.
Can an MCA charge more than my state's usury cap?
In practical terms, yes — because state usury caps apply to loans and courts generally do not treat MCAs as loans. If a court recharacterizes an MCA as a disguised loan (missing reconciliation, no risk of loss, absolute repayment obligation), usury caps can apply retroactively.
Is a confession of judgment legal on an MCA?
In most states, yes. In New York, out-of-state COJs are no longer enforceable in NY courts (2019 reform), but COJs signed by NY businesses under NY-governed contracts remain valid. A few other states restrict or prohibit COJs entirely.
Who regulates the MCA industry?
There is no single federal regulator for MCAs. The FTC and state attorneys general have brought enforcement actions against MCA companies for unfair or deceptive practices. The CFPB collects small business lending data under Dodd-Frank Section 1071, which now includes MCAs.
How do I know a funder is legitimate?
Check that they provide a written commercial financing disclosure if you're in a covered state, that the contract includes a real reconciliation clause, that they are willing to be identified (many stackers hide behind ISO brokers), and that they don't require you to sign a COJ from a state you don't operate in.
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