The Legal Squeeze on MCA Funders in 2026

The merchant cash advance industry is having its most consequential regulatory year to date. Origination volume keeps climbing — U.S. MCA activity is projected to reach somewhere between $18 billion and $25 billion in 2026, up from roughly $15 billion in 2023 — but the legal ground underneath the product is shifting faster than at any point in its history. For funders, 2026 is the year the "is it a loan or a sale" question stopped being theoretical and started determining whether contracts survive in court.

Why the Classification Question Matters So Much

MCAs have always been structured as a purchase of a business's future receivables rather than as a loan. That distinction matters enormously: loans are subject to state usury caps — interest-rate ceilings that, in many states, would make a typical MCA factor rate illegal. A true sale of receivables isn't. The entire product has been engineered around that line for over a decade.

In 2026, that line is being tested more aggressively than ever. A Tenth Circuit ruling widely referred to in industry and legal commentary as "Weiser" has narrowed the scope of federal usury preemption, opening the door for opt-out states — Colorado among them — to apply their own interest-rate ceilings (in Colorado's case, around 21%) even against lenders chartered out of state. That is a meaningful crack in a legal foundation MCA funders have relied on for years.

Courts more broadly are also showing greater willingness to recharacterize MCA agreements as loans when the underlying facts — daily fixed debits, minimal true revenue-sharing risk, aggressive default remedies — look more like lending than a genuine purchase of receivables. Twenty-six U.S. states currently have usury laws on the books, meaning a successful recharacterization argument in any one of them can expose a funder to real downside: voided contracts, unenforceable balances, and in some cases the clawback of prior payments as fraudulent transfers in a merchant's bankruptcy.

The State-by-State Disclosure Wave

Beyond the courts, legislatures have been moving in parallel. New York and California have both implemented commercial financing disclosure laws requiring funders to present an APR-equivalent cost figure alongside the traditional factor rate — a change aimed squarely at giving business owners a clearer, comparable sense of true borrowing cost. Texas has gone further with House Bill 700, which creates an entirely new regulatory category — "commercial sales-based financing" — under Texas Finance Code Chapter 398, bringing registration requirements, mandatory disclosures, and a list of prohibited practices to a market that previously operated with minimal state oversight in the state.

Industry data suggests this disclosure trend is already changing behavior on the funder side: an estimated 45% of MCA companies have updated their contracts to remove confession-of-judgment clauses in response to legal restrictions on the practice in multiple states — a significant shift, given how central those clauses once were to funders' collection leverage.

What This Means for the Cost of Capital

None of this is happening in a vacuum of low stakes. Effective APRs on MCAs — once you annualize the factor rate — can run from roughly 40% up to well over 300% depending on the deal, and industry-wide default rates are estimated at somewhere between 10% and 25%, several times higher than the low-single-digit default rates typical of conventional small-business bank lending. That combination — high effective cost, high default rate, and now rising legal exposure — is precisely why regulators and courts have started paying closer attention.

Compliance costs for MCA firms have already risen by an estimated 30% since 2021 as a direct result of the expanding patchwork of state laws, and that trend shows no sign of reversing in 2026. Firms are also increasingly required to account for the CFPB's Section 1071 data-collection mandate, which brings small-business lending — MCAs included — under a new layer of federal reporting scrutiny.

Structuring Around the Risk

Sophisticated funders are adapting rather than retreating. One notable trend: some larger MCA providers have begun shifting away from the traditional "purchase of receivables" contract altogether, instead issuing formal loan agreements priced through bank partnerships in non-usury states such as Utah, which has no interest-rate cap. That approach sidesteps the recharacterization risk entirely by not pretending to be anything other than a loan, provided it's properly structured through a chartered lending partner.

For funders without that kind of banking relationship, the more common response has been tightening documentation: clearer risk-sharing language that reflects genuine variability in repayment (rather than fixed daily debits dressed up as a percentage), removal of confession-of-judgment clauses where restricted, and closer legal review of collection practices — particularly around ACH debit authorizations and UCC-1 lien filings, both of which have become focal points in recent litigation.

The Takeaway for Capital Allocators

The MCA market isn't shrinking — if anything, growth projections put it on track to nearly double by the early 2030s. But 2026 marks a genuine inflection point in how that growth gets underwritten. The funders who will come out ahead are the ones treating legal structuring as a first-order underwriting question, not an afterthought handled by outside counsel after the fact. In a market moving from "buyer beware" toward "lender beware," structuring discipline is no longer optional — it's the actual product.

At TMG Investment, we continue to track legal and regulatory developments across the alternative lending landscape as part of our broader approach to private capital deployment.