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Breach of Merchant Cash Advance Contract in New York State

Author(s)

New York Commercial Litigator

Ashlee Colonna Cohen
+11 years of practicing law. Founder of Colonna Cohen Law, PLLC. Featured in The City and The New York Post. Cases cited by the FTC and state attorney general offices in successful actions against predatory lenders.

Reviewer(s)

Director of Operations

Natasha Vulin
Oversees operations at Colonna Cohen Law, PLLC. Known for her reliability, organization, and compassionate client care. Plays a key role in client intake, case management, and strategic preparation, ensuring seamless service for business borrowers nationwide.  

Merchant Cash Advances (MCAs) have become a widely used financial tool for small businesses in New York State. While these financing agreements provide quick access to capital, they also come with strict contractual obligations. When a breach of contract occurs—whether by the borrower or the MCA provider—significant legal and financial consequences can follow. Understanding the implications of breaching an MCA contract in New York is essential for both business owners and lenders.

Understanding Merchant Cash Advance Contracts

Unlike traditional loans, MCAs are structured as the sale of future receivables. The lender provides an upfront sum, and the business repays the advance through a percentage of its daily credit card sales or bank deposits. Because of this structure, MCAs are not subject to the same usury laws that regulate interest rates on loans. However, they remain legally binding contracts that require careful adherence.

Common Types of MCA Contract Breaches

A breach of an MCA contract can occur in several ways, including:

  1. Failure to Make Payments: If a business does not meet its repayment obligations, the MCA provider may take legal action to recover the owed amount.
  2. Diversion of Funds: Some agreements include provisions preventing the borrower from redirecting revenue streams to avoid repayment.
  3. Misrepresentation or Fraud: Providing false financial statements, inflating revenue figures, or misleading the lender during the underwriting process can constitute a breach.
  4. Early Repayment Restrictions: Some MCA agreements penalize businesses for paying off the balance ahead of schedule, and violating such clauses can lead to legal disputes.
  5. Violation of Personal Guarantees: Many MCA contracts require personal guarantees, meaning the business owner’s personal assets may be at risk if the contract is breached.

Legal Consequences of Breaching an MCA Contract in New York

New York courts take contract enforcement seriously, and an MCA contract breach can lead to:

  • Lawsuits for Breach of Contract: MCA providers may sue businesses in civil court, seeking full repayment, interest, and additional damages.
  • Confessions of Judgment (COJs): Many MCA contracts include COJ clauses, allowing lenders to obtain a judgment without a trial. New York has limited the enforceability of COJs against out-of-state borrowers, but they are still a risk for in-state businesses.
  • Bank Account Freezes and Liens: Lenders may seek legal orders to freeze bank accounts or place liens on business and personal assets.
  • Debt Collection and Asset Seizure: If a judgment is obtained, the MCA provider may use collection agencies or court-ordered asset seizures to recover the funds.

Defenses Against an MCA Breach Claim

Businesses facing a breach claim may have several defenses, including:

  • Unconscionability: If the contract terms are excessively unfair or deceptive, courts may deem them unenforceable.
  • Lack of Proper Disclosure: Failure by the MCA provider to provide clear terms and APR disclosures may serve as a legal defense.
  • Fraudulent Practices by the Lender: If the MCA provider engaged in misleading or fraudulent conduct, the borrower may have grounds to challenge the contract.
  • Economic Hardship and Force Majeure: In some cases, extreme financial hardship or unforeseen events (such as natural disasters) may be used as a defense against enforcement.

How to Avoid MCA Contract Disputes

To minimize the risk of breaching an MCA agreement:

  • Thoroughly Review Contract Terms: Ensure that repayment terms, fees, and personal guarantees are fully understood before signing.
  • Negotiate Fairer Terms: Some lenders may be willing to adjust repayment percentages or eliminate aggressive legal provisions.
  • Keep Open Communication: If financial difficulties arise, discussing alternative repayment solutions with the MCA provider may prevent legal action.
  • Seek Legal Counsel Before Signing: Consulting with an attorney can help identify potential risks and ensure compliance with contractual obligations.

A breach of a Merchant Cash Advance contract in New York State can lead to severe legal and financial repercussions. Business owners should be aware of their obligations, carefully review contract terms, and seek legal advice when necessary. Understanding both the risks and defenses available can help mitigate potential disputes and ensure smoother financial operations.