Sued by a Merchant Cash Advance Company in New York? What Your Business Can Do

If your business took a merchant cash advance and the funder has now sued, you probably have a summons from New York State Supreme Court, often in Brooklyn, Nassau County or Manhattan. That is usually true even if your business is in another state, because these agreements typically say New York law applies and that you agree to be sued in New York’s courts.

My name is Michael Samuel. I have practiced law in New York since 1993, and I defend businesses in contract and commercial lawsuits, including suits brought by merchant cash advance funders. This article explains what the funder is claiming, when the “it was really a loan” defense works and when it doesn’t, and what to do first.

The most important fact first. You generally have 20 days to respond if the papers were handed to you personally in New York, and 30 days if they were served another way, counted from service. Some funders serve a short “summons with notice” instead of a full complaint, and the deadline applies to that too. If nobody responds in time, the funder can ask for a default judgment for the full balance it claims, plus fees, and then go after your business bank accounts.

A merchant cash advance is usually written as a sale, not a loan. The funder pays your business a lump sum now and, in exchange, buys a larger amount of your future sales, which it collects through daily or weekly debits from your bank account until it has been paid in full.

When the debits start bouncing, or the account is closed or changed, the agreement usually calls that a default. The funder then claims the whole unpaid balance at once, plus fees, and sues both the business and the owner who signed a personal guaranty.

The numbers can grow fast. In one Brooklyn case decided on appeal in 2025, a construction company received $46,335 after fees in exchange for $75,000 of its future receivables. It paid $2,500 before the debits were rejected. The judgment against the company and its owner was $93,651.88.

Your complaint will usually name the funder (or a company that services the advance for it), your business and you as guarantor, and it will attach or quote the agreement. That agreement is the most important document in the case, so find your signed copy and the bank statements showing every debit.

New York caps interest. Charging more than 25 percent a year on a loan is criminal usury, and a business sued on a criminally usurious loan can raise that as a defense. In 2021, in Adar Bays v. GeneSYS ID, New York’s highest court held that a loan found to be criminally usurious is void. Treated as loans, merchant cash advances often work out to far more than 25 percent a year. In one case, the New York Attorney General described rates of up to 820 percent.

But usury only applies to loans, and the agreement says it isn’t one. So the real fight is over one question: was the funder entitled to get its money back no matter what happened to your sales? New York’s appeals courts look mainly at three things:

• Reconciliation. Does the agreement let your payments go down when your sales go down, and did the funder actually honor that?
• A fixed end date. Is the term open-ended, as a true purchase of future sales would be, or is it effectively fixed?
• Bankruptcy. If your business went bankrupt, would the funder still be entitled to full payment, for example by calling bankruptcy a default and enforcing the owner’s guaranty?

Courts go both ways, so the details decide it. The Appellate Division in Brooklyn, which hears appeals from Brooklyn, Queens, Staten Island, Long Island and several counties north of the city, enforced several of these agreements in 2025 and 2026 because they had a real reconciliation clause and did not treat bankruptcy as a default. One of those cases ended in an $8.2 million judgment, upheld in April 2026.

The Appellate Division in Manhattan has been tougher on funders. In October 2025 it refused to give a funder judgment without a trial, because the agreement gave the funder recourse if the business went bankrupt and was backed by the owner’s guaranty. In February 2026 it upheld the Attorney General’s finding that more than 3,000 agreements made by one group of funders were loans in disguise, because the promised reconciliation was never actually performed and the daily payments were fixed. It sent the dollar amount back to be recalculated. In January 2025, the Attorney General settled a separate case against Yellowstone Capital with a judgment of more than $1 billion and the cancellation of more than $534 million that businesses still owed.

Two practical points follow. A business can raise criminal usury as a defense when it is sued, but New York courts have said it generally can’t use usury as the basis for a counterclaim. And the answer depends on your specific agreement and on how the funder actually behaved, so the agreement and your bank records need to be read before anyone tells you the defense is strong or weak.

Did you ask for reconciliation? If your sales dropped, the agreement probably let you ask the funder to lower your payments to match. Whether you asked matters. In a September 2025 case, the Appellate Division in Brooklyn would not even consider a business’s argument that the reconciliation process was a sham, because the business had never used it. In the Attorney General’s case, evidence that funders denied merchants’ reconciliation requests helped show the agreements were really loans. If you asked, find those emails. If you didn’t, write down when your sales dropped and what happened to the debits.

Is the number right? Funders often add default fees, collection fees and attorney’s fees on top of the unpaid balance. Check every payment you made against what the complaint says you paid. Double debits, payments that were never credited and fees the agreement doesn’t allow all reduce what is owed.

Was there really a default? In a true purchase of future sales, the funder takes the risk that sales slow down. If your business kept operating and simply sold less, that may not be a default at all under the agreement’s own terms. Closing the account or moving your sales elsewhere is a different story.

Were the right parties properly served? Each defendant has to be served correctly. In an October 2025 Manhattan case, a related company named in the suit was dismissed because it had never been served. Never assume bad service means you can ignore the papers, though. Raise it through a lawyer, on time.

Settling, carefully. Many of these cases end in a negotiated payoff, and resolving one early can cost far less than fighting it to the end. Read the settlement terms closely. A settlement can let the funder enter a judgment for the full remaining balance, without going back to court, if a payment is missed. In September 2026 the Appellate Division in Brooklyn upheld a judgment of about $2.4 million entered exactly that way against a North Carolina business and the individual sued with it, after they made none of the agreed payments.

Many owners first learn about the case when the business bank account is frozen. That usually means a judgment has already been entered, either by default or from a confession of judgment.

Confessions of judgment. Many merchant cash advance agreements have included a signed confession of judgment, which let the funder get a judgment without a lawsuit. Since August 30, 2019, New York law only allows a confession of judgment to be filed against a person or business that lives or has a place of business in New York. A business with no New York location can no longer be hit this way in New York’s courts.

Default judgments. A judgment entered because nobody answered can sometimes be undone, but the clock matters. A business that was served indirectly, for example through the New York Secretary of State, and didn’t actually receive the papers in time to defend, can ask to defend the case within one year after learning of the judgment (and never more than five years after it was entered), if it has a real defense. Otherwise, a business generally has one year from being served with notice of the judgment to show a reasonable excuse for the default and a real defense.

Either way, move fast. While a judgment stands, the funder can restrain your accounts and collect on it.

Michael Samuel is a New York litigator, in practice since 1993, who defends businesses in contract and commercial lawsuits in the New York state and federal courts, including suits by merchant cash advance funders.

In a funder case, we start with the agreement and your bank statements: whether the transaction can be challenged as a loan, whether the balance claimed is right, whether service was proper and whether you have a counterclaim. Then we tell you what a defense looks like and what a realistic resolution looks like, before you decide anything.

The firm handles the defense for a fixed fee, quoted up front, and the first strategy session is free. More on how we defend these cases is on our contract and commercial litigation defense page.