Using Legal Loopholes to Invalidate Onerous MCA Agreements

Using Legal Loopholes to Invalidate Onerous MCA Agreements

Merchant cash advance (MCA) agreements can seem daunting. The terms are often unfavorable, with exorbitant fees and rates that essentially lock small businesses into debt traps. However, there are ways to fight back against predatory MCAs by exploiting legal loopholes that could invalidate the agreements.

What is a Merchant Cash Advance?

A merchant cash advance provides a lump sum payment to a business in exchange for a percentage of future credit card sales over a set period of time. This differs from a traditional small business loan in a few key ways:

  • There is no set repayment schedule. Instead, the MCA takes a fixed percentage of daily credit card sales.
  • MCAs are quicker and easier to qualify for than bank loans since they are technically an investment rather than debt.
  • The actual cost of an MCA is opaque. Fees and equivalent interest rates are astronomical, often exceeding 100% APR.

This structure allows virtually any business to get fast cash, but the long-term costs are crippling for most.

Common Predatory MCA Tactics

While not all MCAs are predatory, the industry has developed a reputation for overly aggressive and even illegal tactics to ensnare businesses. Some of the most egregious practices include:

  • Misrepresenting or hiding the true cost – Many MCA agreements bury key details in fine print or use confusing terminology to obscure rates and fees.
  • Making misleading comparisons to loans – MCAs are often pitched as superior alternatives to bank loans when the opposite is usually true.
  • Aggressive collections – Some MCAs will freeze bank accounts or otherwise cripple businesses struggling to make payments.

These tactics amount to a bait-and-switch scheme for many small business owners. What initially seems like a lifeline can quickly become an anchor dragging a company under.

Exploiting MCA Legal Loopholes

While the deck seems stacked against business owners in these situations, there are still ways to fight back. Several key legal precedents and loopholes can invalidate onerous MCA contracts:

Usury Laws

Usury laws cap the maximum allowable interest rate on loans. Rates above the usury cap are illegal and unenforceable.

  • Though MCAs claim not to be loans, courts often classify them as such, opening the door for usury challenges. The equivalent APR of an MCA almost always vastly exceeds state usury caps.
  • Even if the MCA structure avoids a direct usury ruling, the agreement terms themselves may still be found “unconscionable” and unenforceable under usury principals. Essentially, courts can throw out the contract if the rates are excessive enough.

Deceptive Practices Protections

When an MCA uses misrepresentation or hides key details in fine print, that constitutes deceptive and unfair trade practices under the FTC Act and state consumer protection laws.

  • This argument has been successfully used in many cases to invalidate the entirety of predatory MCA contracts.
  • Even the threat of action under these statutes can bring MCA companies to the negotiating table.


Beyond specific deception and usury claims, some MCAs are so unfair and one-sided that courts will void them entirely as unconscionable contracts.

  • In particular, courts scrutinize both the “procedural” process of contract formation and the “substantive” contract terms themselves.
  • Procedurally unconscionable aspects could include deception, fine print, high-pressure sales tactics, and unequal bargaining power between parties.
  • Substantively unconscionable terms are those that “shock the conscience” – rates over 100% APR certainly qualify.

With the right legal argument, many onerous MCAs can be defeated or at least renegotiated to less crushing terms. Don’t hesitate to contact an attorney if you feel trapped in an unfair agreement.

Strategies for Avoiding Predatory MCAs

Of course, avoiding legal conflict from the start is ideal. These proactive strategies can help secure business financing while dodging predatory MCA offers:

  • Thoroughly vet any MCA before signing and ask direct questions about rates, fees, contract terms, and policies.
  • Consider alternatives like short-term loans from community banks and credit unions.
  • Only use MCAs as an absolute last resort, when other financing options are unavailable.
  • Negotiate the best possible terms and rates when pursuing an MCA.
  • Consult a lawyer to review any MCA contract before signing.

What to Do if Already Ensnared in a Predatory MCA

If it’s too late and your business is already locked into an abusive MCA contract, take these steps to fight back:

  • Stop payments – Consult an attorney first, but ceasing payments cuts off the MCA’s leverage.
  • Send a formal dispute letter – Demand evidence backing up their claims and threaten legal action.
  • Negotiate a settlement – Offer the MCA a smaller lump-sum payment to walk away.
  • File legal action – Explore claims like usury law violations to invalidate the agreement.

With the right evidence and legal arguments, even the most iron-clad MCA contracts can sometimes be defeated. Don’t let predatory lenders take advantage of your small business!

If you need assistance reviewing an MCA agreement or pursuing legal action, the experienced attorneys at Delancey Street can help. Give us a call at 212-210-1851 for a free consultation.

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