Sued or Debited Daily by a Merchant Cash Advance Funder: What a California Business Can Do

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A merchant cash advance is written as a purchase of your future receivables, not a loan, and that label is why funders say California's interest limits do not apply. Courts look at the actual agreement. If you are served with a California lawsuit, the summons gives you 30 days to respond. Your options usually include invoking the reconciliation clause, negotiating a payoff, challenging the deal as a disguised loan, and contesting an out-of-state suit. Kolmogorov Law, P.C. defends business owners in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a merchant cash advance demand, daily debits you cannot sustain, or a lawsuit you were served with.

What a merchant cash advance is on paper

The funder pays a lump sum. In exchange your business "sells" a larger dollar amount of future sales, and the funder collects through fixed daily or weekly debits from your bank account. The agreement usually adds a personal guaranty from the owner, a security interest in business assets, and a clause choosing another state's law and courts.

California's commercial financing statute describes this structure directly. It defines an accounts receivable purchase transaction as an agreement requiring the recipient to forward or sell to the provider a portion of accounts or cash receipts collected during a specified period or in a specified amount. (Fin. Code, § 22800, subd. (b).)

Owners call it an MCA loan. Funders insist it is not a loan at all.

The deadline if you have been served

If the case is in a California superior court, the summons directs you to file a written response within 30 days after service. (Code Civ. Proc., § 412.20, subd. (a)(3).) Miss it and the funder can ask for a default judgment against the company and against you as guarantor.

If the case was filed in another state, the response time is set by that state's rules and may be shorter. Whether that court has power over a California business, and whether the contract's venue clause holds, are questions to raise there and on time. Our page on forum selection clauses explains how California courts treat them.

What not to do

Do not ignore papers from any court, including one across the country.
Do not block the debits or close the account without a plan. Most agreements treat that as a default that triggers the guaranty.
Do not take a second advance to pay the first.
Do not sign a "settlement" that includes a confession of judgment or a new guaranty before a lawyer reads it.
Do not delete emails, texts, or recorded calls with the broker or funder.

Purchase or disguised loan: what courts look at

California's usury limit applies only to a loan or forbearance, and courts decide what a transaction is by substance over form. (Southwest Concrete Products v. Gosh Construction Corp. (1990) 51 Cal.3d 701, 705.) A true sale is not a loan. The label on the contract does not settle which one you signed.

The California Supreme Court has faced the question before. A finance company documented its deals with a retailer as purchases of the retailer's customer contracts. The court upheld a finding that they were loans, because the paperwork gave the finance company full recourse and the retailer bore the risk that customers would not pay. (West Pico Furniture Co. v. Pacific Finance Loans (1970) 2 Cal.3d 594, 603-604.)

Parties to merchant cash advance disputes argue over the same idea. Do the payments really adjust to actual receipts? Is the funder repaid no matter what happens to sales? Can it pursue the owner personally if the business simply fails? These are arguments, not a settled California test. I know of no California appellate decision that declares every merchant cash advance an illegal loan, and I would not promise that result. The answer depends on the specific contract and on how the funder behaved.

If a court does treat the advance as a loan, the constitutional interest cap and its exemptions come into play. Our page on California usury law for business loans covers the limit and the consequences.

The reconciliation clause

Nearly every agreement says the daily amount is an estimate of a fixed percentage of receipts, and gives the merchant a right to request an adjustment when sales fall. Funders rely on that clause to argue the deal is a purchase. Use it.

Send the request in writing, attach the bank statements the contract calls for, and keep proof of delivery. A funder that ignores or refuses a documented request may have handed you evidence on the loan question and on good faith.

California's disclosure rules for commercial financing

California requires a provider to give a written disclosure when it extends a specific commercial financing offer, and to obtain the recipient's signature on it before the deal closes. The disclosure must state the total funds provided, the total dollar cost, the term or estimated term, the payment method, frequency, and amount, the prepayment policies, and the total cost expressed as an annualized rate. (Fin. Code, § 22802.) These rules cover offers of $500,000 or less. (Fin. Code, § 22800, subd. (n).)

Since 2026, a provider that has made a specific offer and then quotes a charge or pricing metric during the application process must also state the annual percentage rate. It may not use the words "interest" or "rate" in a misleading way. (Fin. Code, § 22806.)

The statute ties violations to the state's financial regulatory laws and does not itself describe a private lawsuit. (Fin. Code, § 22807.) A missing or inaccurate disclosure is still worth finding. It may support a defense or an argument under the Unfair Competition Law.

Guaranties, confessions of judgment, and collection conduct

The personal guaranty is what puts the owner's own assets at stake. Read what triggers it. Many are written to apply only on specified defaults, not whenever revenue drops.

A confession of judgment cannot be used in a California court today. A judgment by confession is unenforceable and may not be entered in any superior court, unless it was obtained or entered before January 1, 2023. (Code Civ. Proc., § 1132.) One aimed at another state's courts is a different matter, covered on our confession of judgment page.

California's fair debt collection statute was also extended to some small commercial debts. For covered commercial credit entered into, renewed, sold, or assigned on or after July 1, 2025, an individual guarantor can be a protected debtor. The transaction and the total commercial credit owed to the same creditor must each be $500,000 or less. The definition names commercial financing providers. (Civ. Code, §§ 1788.1, subd. (d), 1788.2, subds. (h), (n), (o).) A funder will argue that a purchase of receivables is not credit, so I treat this as an argument, not a given.

What to bring to the first meeting

Every funding agreement, including guaranties and any disclosure form.
Bank statements showing the deposit and each debit.
Any reconciliation request and the funder's reply.
Emails, texts, and call notes with the broker and the funder.
Court papers and demand letters, with the dates you received them.

Frequently asked questions

A merchant cash advance company is taking daily payments I cannot afford and threatens to sue. What are my options in California?

Start with the contract's reconciliation clause and request a reduced payment in writing with bank statements. From there the options are a negotiated payoff, a challenge to the agreement as a disguised loan, and defenses based on California's commercial financing disclosure rules. If a lawsuit is served, respond within the deadline on the summons.

Is a merchant cash advance a loan in California?

Not by its label. California courts look at the substance of a transaction, and a true purchase of future receivables is not a loan subject to the usury limit. An advance that must be repaid regardless of sales may be treated as one. The outcome turns on the specific agreement.

How long do I have to respond to a merchant cash advance lawsuit in California?

A California summons directs the defendant to file a written response within 30 days after service, under Code of Civil Procedure section 412.20. If the funder sued in another state, that state's deadline applies and can be shorter. Missing either deadline can lead to a default judgment against the business and the guarantor.

The funder sued my California company in another state under the contract's venue clause. Do I have to defend the case there?

A California business should not ignore it. A court in another state can enter a default judgment if no one responds. Challenges to the venue clause generally must be raised in that case, on that court's schedule, and its jurisdiction is best contested there too.

Can a merchant cash advance funder use a confession of judgment against a California business?

Not in a California court. Under Code of Civil Procedure section 1132, a judgment by confession is unenforceable and may not be entered in any superior court, unless it was obtained or entered before 2023. Funders sometimes file confessions in other states instead, which raises separate questions about that state's law and its power over a California business.

Talk to a California breach of contract attorney

If a funder is debiting your account, threatening suit, or has already served you, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California.

This page provides general information about California law and is not legal advice. Outcomes depend on the funding agreement, the facts, and the court.