Merchant Cash Advance Funds: High-Yield Private Credit or Regulatory Time Bomb?

TL;DR: Merchant cash advance funds pitch accredited investors on 20-40%+ effective yield by purchasing small businesses' future credit card receivables at a discount, but the FTC has already extracted a $20.3 million judgment from one MCA operator and $9.8 million from another. According to the Federal Trade Commission, Jonathan Braun of RCG Advances was hit with $3.4 million in redress, $17 million in civil penalties, and a permanent ban from the industry after a jury found his company engaged in deceptive and abusive collection practices. If you're looking at an MCA fund as a private-credit allocation, the yield is real, and so is the legal exposure sitting underneath it.

The pitch versus the docket

I've seen the pitch decks. A merchant cash advance (MCA) fund buys a slice of a small business's future credit card or debit card sales at a discount, then collects daily or weekly through automated bank withdrawals until the advance is repaid. Because the fund isn't technically making a "loan," it doesn't have to comply with state usury caps that limit interest rates on consumer and commercial loans. That's the entire structural premise: it's a purchase of receivables, not a loan, so the math can produce effective annualized yields that would be illegal if labeled interest.

Those yields are what draw capital into MCA funds in the first place. Factor rates in the 1.2 to 1.5 range on 3-to-9-month terms translate into effective annual percentage rates that regularly land in the 20% to 40%+ band for the fund, before defaults and servicing costs. For an accredited investor tired of 5% money-market yield, that number gets attention fast.

What doesn't show up in the pitch deck as prominently is the docket. The FTC has run multiple enforcement actions against MCA operators in the past several years, and federal courts in New York have started recharacterizing MCA agreements as usurious loans outright, which exposes funders to civil RICO liability, not just a regulatory fine. Both risks sit directly on top of the return stream investors are being sold.

What the FTC has actually done

This isn't theoretical risk. It's adjudicated risk, with dollar figures attached. Here's what's on the public record.

Case / Operator	Outcome	Amount	Source
Jonathan Braun / RCG Advances (Richmond Capital Group)	First-ever FTC jury trial win against an MCA operator, permanent industry ban	$20.3M ($3.4M redress + $17M civil penalties)	FTC, Feb. 2024
RCG Advances / Robert Giardina	Refunds ordered, permanently banned from MCA and debt-collection industries, forced to vacate judgments and liens against merchants	$2.7M+ in refunds	FTC, June 2022
Yellowstone Capital LLC (with Fundry LLC, Yitzhak Stern, Jeffrey Reece)	Settled FTC charges of unauthorized withdrawals and deceptive contract terms, roughly 7,731 refund checks mailed to small businesses	$9.8M	FTC, 2020/2022

The common thread across these cases is not that the underlying business model, buying receivables at a discount, is illegal. It's that specific operators layered deceptive marketing, undisclosed fees, and abusive collection tactics (including confessions of judgment filed against merchants who were current on payments) on top of a legal structure. The FTC went after the conduct. But if you're a limited partner in a fund whose general partner is running that conduct, the conduct's liability becomes your liability, or at minimum your capital's liability, well before you ever see a headline.

The bigger structural problem: courts are recharacterizing the deals

The FTC cases are about bad actors. A separate and arguably more important risk applies to the entire MCA asset class regardless of who's running it: the "sale, not a loan" characterization is losing in court.

Courts in the Southern District of New York have looked at specific MCA agreements (Fleetwood Services, Haymount Urgent Care, and deals involving Lateral Recovery LLC and GoFund Advance LLC among them) and found that despite the receivables-sale label, the agreements functioned as loans. According to CLM's analysis of Fleetwood v. Richmond Capital Group, SDNY courts calculated embedded implied annual percentage rates of 278.5% in the Fleetwood deal, 100% to 300% in Lateral Recovery deals, and over 50% in the Haymount matter once the transactions were treated as loans rather than purchases. Every one of those numbers is well above New York's civil and criminal usury thresholds.

In 2023, the Second Circuit Court of Appeals affirmed a version of this reasoning and adopted what's now called the Principis test, named for Principis Capital LLC, a party in the underlying litigation. It looks at three factors to decide whether an MCA agreement is a true sale or a disguised loan. Does a reconciliation provision let the merchant adjust payments based on actual sales? Does the agreement have a finite term? Does the funder retain recourse against the merchant in bankruptcy? Fail those tests and a court can recharacterize the deal as a loan, which opens the door to usury claims and, per the Fleetwood line of cases, civil RICO damages, treble damages, in plain terms, against the funder.

That's the mechanism you need to understand before you write a check into an MCA fund. The same daily-ACH-debit, confession-of-judgment infrastructure that generates the fund's cash flow is precisely what plaintiffs' lawyers and regulators are using to argue the deal was a loan all along. A fund with weak reconciliation provisions and aggressive bankruptcy recourse language isn't just running a risky business. It's running a business model that a federal appellate circuit has already provided a roadmap for unwinding, and plaintiffs' firms have taken notice.

What the mechanism means for your capital, plainly

Strip away the legal terminology and the cash flow works like this. The fund advances a merchant, say, $50,000 against future card sales, structured as a purchase of $65,000 in future receivables (a 1.3 factor rate). The merchant's payment processor or bank account gets debited daily or weekly, often 10% to 20% of daily card revenue, until the $65,000 is collected, typically over four to nine months. If the merchant's revenue drops and they can't pay, some MCA agreements let the funder file a pre-signed confession of judgment to seize assets or freeze accounts without a new court hearing. Several states, including New York, have now restricted or banned confessions of judgment against out-of-state merchants specifically because of documented abuse in this industry, and that legislative trend is worth tracking because it changes the collection tools available to a fund you might already be invested in.

Investors in the fund are compensated from the spread between what merchants were advanced and what they repay, net of defaults, servicing fees, and the fund manager's carry. When it works, it works well. MCA is short-duration, high-turnover credit, and default-adjusted yields in the high teens to 20s are achievable with disciplined underwriting. When it doesn't work, the losses show up two ways at once. Merchant defaults eat the principal, and regulatory or civil litigation against the fund's collection practices eats the manager's ability to keep operating. That second exposure is a correlated risk that doesn't show up in a standard credit-loss model, and it's the one most retail-facing pitch materials leave out entirely.

Where the honest risk sits

I want to be direct about what due diligence actually needs to cover here, because "check if they're FTC-registered" isn't sufficient. The FTC doesn't license or pre-approve MCA funders. It only enforces after the fact, often years after investor capital has already been deployed and returned or lost.

• Underwriting concentration. Ask what percentage of the fund's book is concentrated in any single industry (restaurants and trucking have historically been overrepresented and volatile) and what the actual default rate has been over a full cycle, not just the last two years.
• Collection practices. Ask directly whether the fund or its servicer uses confessions of judgment, and in which states. This is now the single clearest predictor of regulatory and civil exposure based on the FTC's own case selection.
• Contract structure against the Principis factors. Does the standard agreement include a genuine reconciliation provision tied to actual sales volume? Is there a finite term? Does the funder retain recourse in the merchant's bankruptcy? Answering "no, no, and yes" respectively is closer to a true sale. The inverse pattern is closer to what courts have recharacterized as a loan.
• Manager litigation history. Search the manager's name and any affiliated entities against FTC press releases and PACER filings before committing capital. Jonathan Braun, Robert Giardina, and Tzvi Reich all ran or were affiliated with MCA operations for years before enforcement caught up with them.
• Fund structure and redemption terms. Because the underlying receivables are short-duration, some funds offer periodic redemption windows. Understand what happens to your capital if a portfolio-level enforcement action or lawsuit freezes the manager's operating accounts, since that's a real scenario in this sector, not a hypothetical.

None of this makes MCA funding illegal or automatically fraudulent. Legitimate operators exist, underwrite conservatively, and don't rely on abusive collection tactics. But the base rate of enforcement activity in this specific niche of private credit is high enough that "the manager seems credible" is not adequate diligence on its own.

Why the CFPB and Gramm-Leach-Bliley angle matters too

Regulatory exposure for MCA funds isn't confined to the FTC. The Consumer Financial Protection Bureau has asserted authority over commercial financing disclosure in several states, and the industry has spent years lobbying against the extension of Gramm-Leach-Bliley Act privacy and disclosure standards to small-business lending products, MCA included. California, New York, Utah, and Virginia have already passed commercial financing disclosure laws that require MCA providers to state an estimated annual percentage rate to merchants, the exact figure the "sale, not a loan" framing was designed to avoid disclosing. If you're underwriting a fund's forward return profile, you need to know whether its home jurisdiction, and the states where its merchants operate, already require this disclosure, because compliance costs and factor-rate compression tend to follow disclosure mandates within a year or two of enactment.

That regulatory direction of travel matters for return durability. A fund pricing today's 1.35 factor rate into its return model may find that rate compressed once merchants can shop advances against a disclosed APR the way they'd compare loan offers. Treat any five-year return projection from an MCA fund manager with real skepticism if it doesn't account for tightening disclosure law in the fund's core operating states.

What to actually do next

If an MCA fund is already in front of you, don't evaluate it on yield alone. Request the fund's standard merchant agreement template and run it against the three Principis factors yourself, or have counsel do it. Ask for the fund's gross default rate and net charge-off rate for the trailing 36 months, not just the current year. And ask, in writing, whether the fund or any affiliated servicer has used confessions of judgment, force-placed insurance, or daily debit amounts that exceed the reconciliation terms disclosed to merchants. A manager with clean practices will answer these without hesitation. One that hedges or deflects is telling you something.

If you want exposure to the yield profile without the specific legal tail risk, look at whether the fund can show you a servicing agreement with an independent, licensed collection agency rather than in-house collections, and whether it carries fidelity or E&O coverage that would respond to a regulatory action. Those aren't guarantees, but they're the difference between a fund that has built compliance into its cost structure and one that's pricing yield off cutting corners that regulators have already started punishing.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.