What a Usury Cap Limits
A usury cap is narrower than the word’s reputation suggests. It does not cap the cost of every financial product a business can buy; it caps the interest rate a lender can charge on a loan specifically. New York’s criminal usury statute sets that ceiling at 25% APR, and a loan priced above it can have its entire contract voided, a far harsher remedy than simply trimming back the excess interest. Texas takes a similar but differently calibrated approach: a commercial loan priced above 18% APR is treated as usurious, and pricing that exceeds twice that legal maximum can trigger forfeiture of both principal and interest owed.
Both caps share the same structural limit: they regulate loans. A transaction that is not legally a loan sits outside either statute’s reach entirely, no matter how expensive it turns out to be for the business that entered it.
Why the “Sale, Not a Loan” Label Matters So Much
This is the exact fact pattern an MCA is built around. A properly structured merchant cash advance is characterized as a purchase of a merchant’s future receivables, a percentage of sales the merchant hasn’t generated yet, rather than a loan of money the merchant has to repay on a fixed schedule regardless of how the business performs. Because usury law only governs loans, that characterization is the entire reason a factor rate well above what a 25% or 18% APR cap would allow can still be lawful.
It is also why the characterization itself is worth so much legal attention. If a court decides an agreement was never really a sale, the usury shield built on that label disappears along with it.
The Three-Factor Test Courts Apply
According to a legal summary published by Herrin Law, courts revisiting whether an MCA agreement is really a disguised loan apply a three-factor test: whether the funder has a genuine, exercisable reconciliation right when the merchant’s revenue drops, whether there is a fixed repayment term or definite payoff date, and who bears the risk if the merchant’s business fails outright. The firm’s summary names several cases as examples of courts applying this test, including one it identifies as Champion Auto Sales v. Pearl Beta Funding, decided in New York’s Appellate Division in March 2018.
These specific case citations come from a law firm’s own written summary of the case law, not an independent read of the underlying court opinions, and the case names and holdings should be confirmed against a primary case-law source before anyone treats them as settled precedent rather than one firm’s characterization of it.
A Real Example of What Happens When the Sale Characterization Fails
This is not a purely theoretical risk for a funder. According to a separate legal analysis published by Lake Le Tag Law, a federal bankruptcy court in the Southern District of New York recharacterized MCA agreements as loans in a case the firm identifies as In re J.P.R. Mechanical, Inc., despite the agreements’ own sale-of-receivables labeling, and allowed recovery of over $3 million in payments the merchant had already made before the bankruptcy filing.
As with the case citations above, this detail comes from a law firm’s own written summary rather than an independently verified court record, and the case caption and exact recovered amount should be confirmed against a primary case-law database before being cited as settled fact. It is included here because it shows what the three-factor test costs a funder when a court applies it and finds the sale characterization does not hold.
Why This Isn’t the Same Question as a State Disclosure Law
Usury is a question about whether a transaction is a loan at all. A state commercial financing disclosure law, the kind tracked across eleven states in the site’s own tracker, is a different question entirely: it assumes the transaction is lawfully structured and instead governs what a provider has to tell the merchant before the deal closes. A properly structured MCA can clear the usury question completely and still owe a merchant a disclosure it never delivered, or vice versa. Neither compliance question substitutes for the other.
A broker who has internalized “MCA isn’t a loan, so usury doesn’t apply” sometimes assumes that logic extends to disclosure obligations too. It does not, and treating the two as one question is a real, avoidable mistake.
What a Broker Should Do With This
None of the above is legal advice, and a specific agreement’s characterization is ultimately a question for the funder’s own counsel to structure and defend. What a broker can control is not selling around the distinction: pitching an MCA as a way to get a merchant financing at a rate a bank loan couldn’t legally charge invites exactly the scrutiny that erodes the sale characterization a funder is relying on, since it frames the product as a loan-workaround rather than a genuine purchase of receivables.
The safer posture is understanding the reconciliation-right, fixed-term, and risk-of-loss factors well enough to look past a deal’s paperwork and recognize when its actual structure might not hold up to the same test a court would apply.
What this means for you
- Usury caps govern loans specifically; New York caps interest at 25% APR and Texas at 18% APR for a loan to avoid usury treatment, with neither cap reaching a transaction that is not legally a loan.
- A properly structured MCA is characterized as a purchase of future receivables, not a loan, which is the entire legal basis for why usury caps generally do not apply to it.
- Courts revisiting that characterization apply a three-factor test, genuine reconciliation right, fixed term, and risk of business failure, per a law firm summary that should be verified against primary case law before being cited as settled precedent.
Sources
The external data in this guide draws on the sources below. Figures described in the text as estimates or industry triangulations are directional and are not attributed to a single dataset.
- Herrin Law, MCA Loan vs. Sale Recharacterization
- Lake Le Tag Law, Merchant Cash Advances: Legal Landscape, Bankruptcy Recovery, and Litigation Support