Merchant Cash Advances vs. Loans in Bankruptcy
The label on an agreement does not always determine its bankruptcy treatment. A conventional loan creates a repayment obligation, while a true merchant cash advance is structured as a purchase of future receivables; courts may examine the transaction’s economic substance.
Features of a Conventional Loan
Loans typically require repayment of principal with interest on defined terms. They may be secured by receivables, inventory, equipment, real estate, or guarantees, and the secured portion of a claim depends on enforceable liens and collateral value.
Features Often Seen in MCA Agreements
MCA documents may describe purchased receivables, a specified amount, daily or weekly remittances, reconciliation provisions, and recourse events. The allocation of collection risk can be central to characterization.
Why the Difference Matters in Chapter 11
Characterization can affect the nature and amount of the claim, lien disputes, cash-collateral rights, defenses, and plan treatment. State usury or licensing arguments may also depend on whether the transaction is legally a loan.
A Practical Review
Counsel should compare the contract language with actual performance: whether remittances were truly variable, whether reconciliation worked, whether repayment was absolute, and what happened when sales declined.
Frequently Asked Questions
Is every MCA really a disguised loan?
No. Characterization depends on the agreement, performance, governing law, and applicable precedent.
Can both loans and MCAs be included in Chapter 11?
Claims arising from both may be addressed, but their classification, validity, priority, and treatment can differ.
Related Bickham Law Resources
Learn more about Chapter 11 bankruptcy, business reorganization, Subchapter V, and continued business operations.
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This article provides general information and is not legal advice. Outcomes depend on current law and the facts of each case.