Glossary · legal

Recharacterization

Also called recast as a loan, disguised loan, true sale challenge, reclassification.

A court treating a purported purchase of future receivables as a secured loan instead, which brings the transaction inside usury, licensing and lending law it was drafted to sit outside of.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

Advance agreements are written as purchases. The funder buys a specified percentage of future receivables for a discounted price paid today; the merchant delivers receipts until the purchased amount is delivered. Drafted that way, the factor rate is not interest, so state usury ceilings are argued not to apply, and the funder is not making a loan, so lending licence requirements are argued not to be engaged.

Whether the substance matches the form is a question that arises after the fact — raised by a merchant defending a collection action, by a bankruptcy trustee, or by a state regulator.

What courts have examined

Reconciliation.Whether the merchant has a genuine, enforceable right to have remittances adjusted to actual receipts, and whether the funder honoured it in practice or buried it behind conditions and discretion.
Finite term.Whether the agreement effectively imposes a fixed repayment period, or whether delivery genuinely continues for as long as the receivables take to arrive.
Absolute obligation to repay.Whether the merchant must deliver the full amount regardless of what happens to the business, or whether a bona fide decline in sales, without fault, is a defence rather than a breach.
Remedies and events of default.What triggers default, whether the triggers include matters unrelated to receivables performance — a further financing, a change of control, a single returned debit — whether the personal guarantee is of performance or of payment, and whether the entire unpaid purchased amount can be accelerated.
Risk of loss.Whether the funder actually took the risk that the business would fail.

A New York appellate framework widely cited in this area turns on three of these — a reconciliation provision, whether the term is finite, and whether the funder has recourse if the merchant declares bankruptcy — and courts elsewhere apply their own tests. Outcomes are fact-specific and jurisdiction-dependent.

Where this one catches people

"It is a purchase, not a loan, so the rate cap does not apply" is a description of the drafting, not a ruling about your contract. It offers you nothing at signing. You cannot rely on a usury protection you may not have, and you cannot plan on a court later reclassifying an agreement you will have been performing for a year by the time anyone looks at it. Recharacterization is a litigation argument with real cost and an uncertain result, not a strategy.

What is in your control at signing is the reconciliation clause, and it is the factor most consistently examined. A reconciliation right that is discretionary, that requires the funder's consent, that permits only one request per period, that demands documentation you cannot produce quickly, or that allows the funder to refuse without reasons is weak — weak evidence that this is a purchase, and weak protection when your sales fall. Read that clause before you read the rate.

Where you will meet this term

Merchant Cash Advance Revenue-Based Financing

Read next

Confession of judgment (COJ)A pre-signed admission of liability that lets a funder obtain a court judgment on default without suing you, … Contract for the sale of future receivablesThe agreement behind a merchant cash advance, drafted as a sale of a fixed dollar amount of future receipts r… Merchant cash advance (MCA)A purchase of a fixed dollar amount of a business's future receipts at a discount, collected as a percentage … Personal guarantee (PG)An individual's separate promise to pay the business's obligation out of personal assets, enforceable even af… Purchase and sale agreementThe contract documenting an advance as a sale of a specified amount of future receipts rather than a loan, co… ReconciliationComparing what the funder actually collected against the percentage of receipts it was entitled to, and adjus… Reconciliation clauseThe contract provision setting out whether, when and how the fixed payment gets adjusted back to the agreed p… True LenderThe doctrine asking which party is really making a loan when a bank is named on the note but a non-bank marke… UsuryCharging interest above what state law permits on a loan; the doctrine applies to loans, which is why the loa… Usury capThe maximum interest rate a state permits on a loan, set by statute, differing by state, by type of lender an…

Recharacterization — common questions

What does recharacterization mean?

A court treating a purported purchase of future receivables as a secured loan instead, which brings the transaction inside usury, licensing and lending law it was drafted to sit outside of.

Where does recharacterization catch people out?

"It is a purchase, not a loan, so the rate cap does not apply" is a description of the drafting, not a ruling about your contract. It offers you nothing at signing. You cannot rely on a usury protection you may not have, and you cannot plan on a court later reclassifying an agreement you will have been performing for a year by the time anyone looks at it. Recharacterization is a litigation argument with real cost and an uncertain result, not a strategy.

Is recharacterization the same as an interest rate?

Recharacterization is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does recharacterization apply to?

Merchant Cash Advance, Revenue-Based Financing.

Is there a worked example of recharacterization?

Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.

What else should I read alongside recharacterization?

Confession of judgment, Contract for the sale of future receivables, Merchant cash advance, Personal guarantee, Purchase and sale agreement.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.