Florida Court Affirms That Merchant Cash Advance Product Not Subject to Usury StatuteThis month, a Florida appellate court held that a merchant cash advance (MCA) purchase and sale agreement was not a “disguised loan” and, therefore, was not subject to Florida’s criminal usury statute. MCA purchase and sale agreements, which offer merchants a fast and efficient way to obtain funding for their operations, are not loans. Rather, these agreements constitute the purchase of a merchant’s future receipts by the MCA company. However, some merchants have claimed that MCAs are “disguised loans” subject to their respective states’ usury law. While several states have well-developed case law differentiating loans from the purchase and sale of receivables, Florida suffers from a relative lack of authority on the issue. Fortunately, in Craton Entertainment, LLC v. Merchant Capital Group, LLC, Florida’s Third District Court of Appeal issued a reasoned opinion holding that an MCA purchase and sale agreement was not a loan, and therefore not subject to Florida’s criminal usury statute. This decision provides good precedent for MCAs facing recharacterization claims in Florida and welcome guidance for MCA companies doing business with Florida merchants.

In 2016, Merchant Capital sued Craton over the default of an MCA transaction. Craton responded with a 12-count counterclaim. In a nutshell, Craton contended that the purchase and sale agreement was a disguised loan, and that Merchant Capital violated Florida’s criminal usury statute. The parties filed competing motions for summary judgment on their respective claims and counterclaims. Ultimately, the trial court ruled in favor of Merchant Capital, holding that the underlying transaction was the sale of future receivables subject to a reconciliation provision, not a loan subject to Florida’s usury laws.

Craton appealed to Florida’s Third District Court of Appeal, arguing that the trial court erred by holding that the purchase and sale agreement was not a loan. Specifically, Craton claimed that the agreement contained all of the characteristics of a loan. For instance, Craton cited the common practice of subjecting the business to a credit check, the lack of a provision in the agreement allowing “forgiveness” or “voiding” of the “debt,” the security interest Merchant Capital took in Craton’s assets, and the personal guarantee signed by Craton’s owner.

In response, Merchant Capital argued that the plain language of the agreement stated that the parties contemplated a buy-sell agreement. Perhaps more importantly, the agreement itself did not bear the hallmark of a loan: the absolute right by the party advancing the funds to demand repayment. Instead, Merchant Capital’s ability to obtain any funds from Craton was expressly conditioned on Craton’s ability to earn revenue. Moreover, and contrary to Craton’s assertions during the litigation, the owner’s personal guarantee did not guarantee repayment. Rather, Craton’s owner guaranteed Craton’s performance under the purchase and sale agreement. Merchant Capital also referenced the reconciliation provision, which was designed to calibrate draws from Craton’s bank accounts based on the ebbs and flows of Craton’s business.

Ultimately, the Third District Court of Appeal affirmed the trial court’s judgment, holding that the purchase and sale agreement was not a loan. Even better, the court’s one-page order provided a basis for its decision by citing several favorable Florida decisions. As such, this decision provides good legal precedent for MCA companies litigating similar claims. Notably, the court cited case law for the proposition that an MCA agreement is not a loan where the “repayment obligation is not absolute, but rather contingent on or dependent upon the success of the underlying venture.” The court also cites authority recognizing that a transaction is not a loan where “a portion of the investment is at speculative risk.”


The Merchant Capital decision is very good news for MCA companies doing business with Florida merchants. The underlying lawsuit involved several commonly litigated issues in the MCA space, and the court unambiguously came down on the side of the MCA company. This case also illustrates the importance of a carefully structured purchase and sale agreement. Keep in mind, however, that a well-crafted agreement alone will not fully protect MCA companies from successful recharacterization claims. Courts in states other than Florida have recharacterized MCA purchase and sale agreements as loans based on the parties’ course of dealing, advertising, and other factors. While helpful, the Merchant Capital decision does not address practices outside of the agreement that could pose a recharacterization risk. Companies should invest time and resources to perform internal and external audits of all business processes, including marketing, websites and social media, and internal policies and procedures to monitor for compliance with the various state laws differentiating loans from MCAs.