Over the past several years, disclosure laws governing commercial financing have reshaped how Merchant Cash Advance (“MCA”) providers, brokers, and platforms communicate with small business merchants. While MCAs are not loans, multiple states now require standardized disclosures intended to increase transparency in commercial financing transactions. These laws have created both clarity and confusion: clarity for merchants seeking to understand the cost of capital, and confusion for MCA providers attempting to comply without undermining the legal distinction between a purchase of receivables and a loan.
This article provides a national, comparative overview of MCA disclosure laws, explains why they exist, outlines what MCA providers are required to disclose, and — just as importantly — identifies what should not be disclosed to avoid regulatory and legal risk. It also examines enforcement trends and best practices for navigating an evolving compliance landscape.
1. Understanding MCA Transactions and Why Disclosure Laws Matter
A Merchant Cash Advance is a commercial transaction in which a funder purchases a fixed amount of a merchant’s future receivables at a discount. Repayment is contingent on business performance, and the funder assumes the risk that receivables may never be generated. This structure distinguishes MCAs from loans, which involve a fixed principal, a defined interest rate, and an absolute obligation to repay.
Despite this distinction, regulators and legislators have increasingly focused on MCAs due to their widespread use by small businesses and the perceived complexity of pricing structures. Disclosure laws are designed to address one central concern: merchants often struggle to compare different financing products on an “apples-to-apples” basis.
Rather than reclassifying MCAs as loans, most states have opted to require disclosures that resemble loan-style transparency while preserving the legal characterization of MCAs as non-loan products. This balancing act is the central tension underlying commercial financing disclosure laws.
2. The Rise of Commercial Financing Disclosure Laws
A National Trend, Not a Single-State Issue
While New York, California, and Connecticut are often cited as the most prominent examples, they are part of a broader national trend. Legislatures across the country have concluded that small businesses deserve clearer information when entering financing arrangements, regardless of whether the product is labeled a loan, lease, or receivables purchase.
These laws typically apply to a wide range of commercial financing products, including:
- Loans
- Lines of credit
- Factoring arrangements
- Sales-based financing (including MCAs)
Importantly, most statutes explicitly acknowledge that MCAs are not loans, even while subjecting them to disclosure requirements.
Why States Require Disclosures for Non-Loan Products
States generally justify these laws on three grounds:
- Transparency: Merchants should understand the economic impact of a financing transaction.
- Comparability: Standardized disclosures allow merchants to compare different financing options.
- Market Integrity: Clear disclosures reduce deceptive or misleading practices.
From a policy perspective, the focus is not on changing the nature of MCA transactions, but on regulating how they are presented.
3. A Comparative Narrative: How States Approach MCA Disclosures
While disclosure laws vary by jurisdiction, several common themes emerge when viewed collectively.
Common Elements Across States
Most states with commercial financing disclosure laws require providers to disclose:
- The total amount of funds provided
- The total amount the merchant is expected to remit
- The method and frequency of payments
- An estimated term or duration
- Prepayment or reconciliation rights
- Any collateral or guarantee requirements
However, how these disclosures are framed — and the level of precision required — differs significantly.
Key Differences in State Approaches
Some states emphasize standardization, mandating specific formats and terminology. Others focus on substantive transparency, allowing flexibility as long as disclosures are clear and not misleading.
Certain jurisdictions require disclosures to be presented before consummation of the transaction, while others regulate ongoing communications. Some impose penalties for technical noncompliance, while others reserve enforcement for egregious or deceptive conduct.
For MCA providers operating nationally, this patchwork creates compliance complexity and heightens the importance of a unified, conservative disclosure strategy.
4. What Must Be Disclosed in MCA Transactions
Although specifics vary by state, the following categories of information are commonly required to be disclosed in MCA transactions.
4.1 Total Amount of Receivables Purchased
The disclosure should clearly state the total dollar amount of future receivables being purchased. This figure represents the maximum amount the funder may collect, subject to reconciliation and business performance.
Clarity here is critical. Merchants should understand that this is not “principal plus interest,” but rather the agreed-upon purchase amount.
4.2 Purchase Price and Net Funding Amount
Providers are generally required to disclose:
- The gross purchase price (amount advanced)
- Any fees deducted
- The net amount funded to the merchant
This disclosure helps merchants understand how much capital they are actually receiving and prevents confusion caused by upfront deductions.
4.3 Payment Method and Frequency
MCAs are typically collected via:
- Daily or weekly ACH debits
- Split funding arrangements tied to receivables
Disclosures must explain how payments are calculated and withdrawn, emphasizing that amounts fluctuate based on receivables where applicable.
4.4 Estimated Term or Duration
Because MCAs do not have fixed terms, states often allow — but require — disclosure of an estimated duration based on historical or projected performance.
This estimate must be clearly labeled as non-binding and contingent on business activity.
4.5 Estimated Payment Amounts
Some states require disclosure of estimated periodic payment amounts or equivalents. These estimates must be framed carefully to avoid implying a fixed obligation.
4.6 Reconciliation Rights
Reconciliation is a defining feature of a true MCA. Disclosures should explain:
- The merchant’s right to request reconciliation
- The conditions under which reconciliation applies
- Any limitations or procedural requirements
Failure to clearly disclose reconciliation rights has been a key factor in adverse enforcement actions.
4.7 Default Provisions
Disclosures should describe events of default, including:
- Bankruptcy
- Fraud or misrepresentation
- Interference with receivables
Importantly, default should not be tied solely to a merchant’s inability to generate receivables.
4.8 Collateral and Personal Guarantees
If a personal guarantee or security interest is required, this must be disclosed clearly and prominently.
4.9 Estimated APR (Where Statutorily Required)
In specific jurisdictions—including California, New York, Utah, and Virginia—providers are legally mandated to disclose an “Estimated APR” or “Estimated Annualized Rate.”
- The Compliance Rule: In these states, omitting this calculation is a regulatory violation.
- The Legal Nuance: This figure must be explicitly labeled as an “Estimated APR” provided for regulatory compliance and comparison purposes only. It should be accompanied by a disclaimer stating that it is not a contractual interest rate and does not transform the purchase of receivables into a loan.
5. What Should NOT Be Disclosed — and Why It Matters
While transparency is required, using improper loan-centric framing can lead to a transaction being recharacterized as a disguised loan, triggering usury and licensing penalties.
5.1 Voluntarily Calculated Interest Rates
Unless an “Estimated APR” is specifically required by state law (as noted in Section 4.9), providers should avoid calculating or presenting an interest rate. Describing the cost of capital as “interest” outside of mandatory disclosures can be used as evidence that the transaction is a loan rather than a purchase of future receivables.
5.2 Fixed Payoff Dates or “Maturity” Terms
Disclosing a “Maturity Date” or a guaranteed payoff date undermines the contingent nature of an MCA. Because repayment depends on the merchant’s sales volume, the duration is inherently variable.
- The Fix: Always use the term “Estimated Duration” and clearly state that the timeframe is non-binding and contingent on business performance.
5.3 Loan Terminology
The use of certain terms in contracts, disclosures, or marketing materials can act as a public admission of non-compliance. To maintain the legal distinction of an MCA, avoid:
- Borrower / Lender (Use Merchant / Funder or Purchaser)
- Principal (Use Purchase Price or Advance Amount)
- Interest (Use Factor Rate or Total Delivery Amount)
- Loan / Debt (Use Purchase of Future Receivables or Sales-Based Financing)
5.4 Rigid or “Fixed” Payment Obligations
Avoid describing the remittance as a “fixed payment” or “installment.” Framing the daily or weekly remittance as an absolute obligation—rather than a percentage of sales—is a primary factor courts use to recharacterize MCAs as loans.
6. Recharacterization Risk and Legal Consequences
Improper disclosures are not merely technical violations. They can have cascading legal consequences, including:
- Recharacterization of the MCA as a loan
- Exposure to usury laws
- Licensing violations
- Contract unenforceability
Courts and regulators often look beyond labels to substance. Disclosures that contradict the contingent, non-loan nature of an MCA can be decisive evidence.
7. Enforcement Trends: What Regulators Are Focusing On
Increased Scrutiny Without Blanket Prohibition
Recent enforcement trends suggest that regulators are not seeking to eliminate MCAs, but rather to police how they are sold and disclosed.
Common enforcement themes include:
- Failure to provide required disclosures
- Misleading cost representations
- Inadequate reconciliation processes
- Broker misrepresentations attributed to funders
Broker and ISO Liability
Increasingly, regulators recognize that brokers play a critical role in shaping merchant expectations. Some enforcement actions have focused on whether funders exercised reasonable oversight of broker conduct.
This trend underscores the importance of aligned disclosures across all distribution channels.
8. Why Disclosure Laws Can Distort MCA Economics
While disclosure laws aim to improve transparency, they can unintentionally distort how MCAs are perceived.
Loan-style metrics applied to non-loan products can:
- Overstate cost comparisons
- Mislead merchants about risk allocation
- Undermine the value of flexibility inherent in MCAs
A compliance-first approach does not mean abandoning the core economic reality of MCAs. It means explaining that reality clearly, consistently, and lawfully.
9. Best Practices for MCA Disclosure Compliance
9.1 Adopt a National Baseline Standard
Given the patchwork of state laws, many providers adopt a single disclosure framework that meets or exceeds the strictest requirements.
9.2 Train Brokers and Sales Teams
Disclosures are only effective if sales practices align with them. Training should emphasize:
- Proper terminology
- Avoidance of rate comparisons
- Accurate explanation of reconciliation
9.3 Regularly Review and Update Disclosures
Disclosure laws continue to evolve. Periodic legal review is essential to maintaining compliance.
10. Compliance Checklist
- ✔ Clearly disclose purchase price and total receivables
- ✔ Label all time and payment estimates as non-binding
- ✔ Avoid interest rate and loan terminology
- ✔ Prominently disclose reconciliation rights
- ✔ Align broker communications with written disclosures
- ✔ Monitor state-level developments
Conclusion
Disclosure laws in the MCA industry reflect a broader shift toward transparency in commercial financing. While these laws introduce compliance challenges, they also offer an opportunity for the industry to mature, standardize practices, and build trust with merchants.
The key is balance: complying fully with disclosure requirements while preserving the fundamental characteristics that distinguish MCAs from loans. Providers who approach disclosures thoughtfully — disclosing what must be disclosed, avoiding what should not be disclosed, and aligning legal form with economic substance — are best positioned to navigate an increasingly regulated environment.
