In the November/December issue of the ABF Journal, attorney Jefferey Wurst explains the different types of MCAs and how Courts have ruled regarding the vehicle. (See http://www.abfjournal.com/%3Fpost_type%3Darticles%26p%3D78264?utm_source=ABF+Journal+E-News+Subscribers&utm_campaign=c3a4e757fc-ABF+Journal+e-news+01%2F24%2F2019&utm_medium=email&utm_term=0_de329107f7-c3a4e757fc-30665341)
According to Mr. Wurst, first there "are MCAs that advance money and get repaid solely from the collection of future receivables (assuming the risk of collection) and those that advance money and get repaid by taking daily or weekly ACH payments from the client’s bank account whether or not any receivables actually exist." "Second are MCAs that rely on the performance of receivables found in factoring, which are generally based on true sales of the future receivables and without recourse."
Mr. Wurst goes on to explain that one of the key issues involves the characterization of the MCA as a loan or a purchase of a receivable. The answer to this question determines whether the MCA is subject to usury statutes (to the extent they exist). According to Mr. Wurst, under "New York law, the penalty for lenders making a usurious loan is not being deprived of any interest payments, as it is in many jurisdictions, but being deprived of receiving both interest and principal. In other words, the borrower gets a windfall by forgiveness of debt when it has borrowed money under usurious terms. Thus, it should not come as a surprise that when confronted with a lawsuit to recover on advances made to a merchant, that merchant attempts to claim the high cost of funds they are paying is usurious."
Mr. Wurst then explains that "[w]hether an MCA is a usurious loan first depends on whether the merchant sold the receivable or borrowed money with the receivable as collateral. Whether the sale of the receivable was a true sale under applicable law determines this."
The analysis regarding a true sale or a loan is complex and not suitable for a discussion here, but if you have any questions about how an MCA will be classified (i.e., true sale or loan), the attorneys at FactorLaw can assist.