When are Merchant Cash Advance Agreements Illegal in Connecticut?

Connecticut has strong laws designed to protect people and businesses from unfair lending practices. For small business owners, entrepreneurs, and financial managers seeking more information about financing options, it's important to understand why Merchant Cash Advances (MCAs) are often considered illegal under Connecticut law. Here, we explain the reasons behind this and what it means for both lenders and borrowers.

What is a Merchant Cash Advance (MCA)?

A Merchant Cash Advance is a way for businesses to get cash quickly. In an MCA, a business gets a lump sum of money from a lender and agrees to pay it back by giving the lender a percentage of its future credit card sales or other receivables. This might sound simple, but it often means the business ends up paying back a lot more than it borrowed.

MCA's are Illegal in Connecticut When they Charge Too Much

One major weakness common among MCA's is Connecticut's strong usury laws, which prevent lenders from charging excessively high interest rates. They don’t just apply to traditional loans but also to any financial deal that works like a loan, even if it’s called something different or has complex or technical language, like an MCA.

Even though an MCA is described as a sale of future receivables, they generally function like a loan because the business gets money upfront and has to pay back more money over time. If the repayment terms require too much money too quickly (greater than an equivalent loan with a 12% annual interest rate), it’s considered "usurious."

Any usurious contract is unenforceable by the court. Anyone sued for breaching an usurious contract may be entitled to keep the principal and additional legal action against their lender or debt collector.

What Happens When an Illegal MCA is Taken to Court

If you or your business signed an MCA and the lender sues you to enforce in a Connecticut court, they might freeze your assets before the lawsuit even begins by asking the judge for a prejudgment remedy. Banks will usually freeze your accounts if they are sent a prejudgment remedy, making Connecticut a popular state to bring MCA enforcement lawsuits.

If your lender is suing you, contact us to schedule a consultation with one of our experienced MCA attorneys. We specialize in defending MCA borrowers and other contract matters. We may be able to get your accounts unfrozen if you are subject to a prejudgment remedy.

If you're considering enforcing an MCA in Connecticut, contact us to resolve any compliance issues with your contract to ensure it is collectible and that you are protected from litigious borrowers.