The merchant cash advance (“MCA”) industry recently provided two different bankruptcy courts with an opportunity to consider the characterization of MCA funding transactions as either “true sales” of receivables or “disguised loans”. [1] MCA funders typically provide cash to a financially distressed company in exchange for a percentage of that company’s future receivables collection. Companies in need of liquidity will often seek to monetize their receivables, either by selling them (i.e., a true sale) or using them as collateral for a loan (i.e., a secured loan). Recognizing the benefits of having an ownership interest in such assets in case of a counterparty’s bankruptcy, MCA funders typically attempt to structure their transactions as “purchases” of a company’s future receivables. For that same reason, a bankruptcy trustee or a debtor-in-possession will often argue that these transactions are really “disguised loans” and that the MCA funder is only a secured creditor of the bankruptcy estate that owns the receivable.
Continue Reading Receivables Transactions Revisited: Recent Decisions Split on Sale vs. Loan Characterization