The Three Factors That Determine Whether a Financing Arrangement Is a Loan Under New York Law

By: Jeffrey M. Haber

Introduction

What is a “loan” under New York law? The question appears straightforward, but the answer is often far more complicated than the label parties attach to transaction documentation. Courts applying New York law have long recognized that whether a transaction constitutes a loan depends on its substance rather than its form. This distinction is important because a finding that a transaction is a loan can trigger a host of legal consequences, including the application of New York’s civil and criminal usury statutes.

At its core, a loan involves the transfer of money from one party to another, coupled with an absolute obligation to repay the principal, usually with additional compensation in the form of interest. Yet modern financing transactions frequently blur the lines. Merchant cash advances, litigation funding arrangements, revenue-based financing agreements, and other financial products are often structured to avoid characterization as loans. As a result, New York courts have devoted considerable attention to determining when a transaction creates a true repayment obligation and when repayment is contingent on future events or performance.

The distinction is more than academic. If a transaction is not a loan, New York’s usury laws typically do not apply. Conversely, if a court concludes that an arrangement is, in substance, a loan, the transaction may be subject to statutory limitations on interest rates and other lending regulations. Consequently, litigants and courts frequently focus on the threshold question of whether a loan exists before addressing any broader challenges to the transaction.

In NewCo Capital Group LLC v. SPE Trading, Inc., 2026 N.Y. Slip Op. 04057 (4th Dept. June 26, 2026), the definition of a loan under New York law, the elements courts consider when making that determination, and the key principles that distinguish loans from other forms of financing and commercial investment arrangements were addressed by the Court.

Applicable Principles

“A transaction ... is usurious under criminal law when it imposes an annual interest rate exceeding 25%.”[1] General Obligations Law § 5–521 bars a corporation from asserting usury in any action, except in the case of criminal usury as defined in Penal Law § 190.40, and then only as a defense to an action to recover repayment of a loan, and not as the basis for a cause of action asserted by the corporation for affirmative relief.[2]

As the Appellate Division, First Department, explained three decades ago:[3]

While the statute expressly prohibits only the interposition of usury as a defense, this court has employed the principle that a party may not accomplish by indirection what is directly forbidden to it and has accorded the rule a broader scope. Thus, it is well established that the statute generally proscribes a corporation from using the usury laws either as a defense to payment of an obligation or, affirmatively, to set aside an agreement and recover the usurious premium. The statutory exception for interest exceeding 25 percent per annum is strictly an affirmative defense to an action seeking repayment of a loan and may not, as attempted here, be employed as a means to effect recovery by the corporate borrower.

As noted, the “rudimentary element of usury is the existence of a loan or forbearance of money.”[4] Thus, “where there is no loan, there can be no usury, however unconscionable the contract may be.”[5]

If the borrower establishes that the loan is usurious, the transaction is deemed void and unenforceable.[6] “When determining whether a transaction constitutes a usurious loan, it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.”[7]

The primary question in determining if a transaction is a loan or some other arrangement is “whether the plaintiff is absolutely entitled to repayment under all circumstances; [u]nless a principal sum advanced is repayable absolutely, the transaction is not a loan.”[8] “Usually, courts weigh three factors when determining whether repayment is absolute or contingent: (1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy.”[9]

In NewCo Capital, the Appellate Division, Fourth Department, applied the foregoing three-factor test to distinguish a loan from a merchant cash advance and held that the agreement was not a loan because it contained meaningful reconciliation provisions, had no finite term or fixed repayment schedule, and placed the risk of the merchant’s business failure, including bankruptcy, on the purchaser rather than guaranteeing repayment. Accordingly, as discussed below, because repayment was contingent on the merchant’s future receivables and not absolutely required, the Court concluded that the agreement was a revenue purchase agreement rather than a usurious loan.

NewCo Capital Group LLC v. SPE Trading, Inc.

Plaintiff commenced the action following defendants’ alleged breach of a revenue purchase agreement (“agreement”) entered into between plaintiff and defendants. Under the agreement, plaintiff advanced a monetary amount to the entity defendants in exchange for 7% of the future revenues of their business until the purchased amount, i.e., an agreed-upon amount that was greater than the advanced amount, was paid to plaintiff. The agreement contained a weekly remittance amount, which constituted a “good faith estimate of” plaintiff’s share of the future revenue stream. The individual defendant guaranteed the entity defendants’ performance of the agreement.

Under the agreement, an event of default included, among other things, the entity defendants’ failure to request a reconciliation or adjustment to the remittance within one business day after the remittance was returned for insufficient funds in the bank account. On January 4, 2024, the entity defendants’ bank returned their remittance for insufficient funds, and the entity defendants failed to request a timely reconciliation or adjustment to that remittance.

After the alleged event of default, plaintiff commenced the action for breach of the agreement and personal guarantee and moved for summary judgment on the complaint. Defendants appealed from an order granting the motion in part and awarding damages and attorneys’ fees to the plaintiff.

As an initial matter, the Court held that plaintiff proved its claim for breach of contract by “establish[ing] that an agreement existed, it performed under the agreement, defendants breached the agreement, and plaintiff sustained damages.”[10]

Having found that plaintiff satisfied its burden of proving a breach, the Court turned to defendants’ contention that the agreement was void because it was a criminally usurious loan. The Court rejected that contention using the three factors discussed above.

With respect to the first factor, the Court noted that “the agreement had two reconciliation provisions, whereby the weekly remittance would be modified both retroactively and prospectively upon request and with proof of earned revenue amounts.”[11] The Court explained that “[i]f the entity defendants made either request, plaintiff was required to modify the remittance amount to reflect the entity defendants’ actual receipts.”[12] Based upon the clarity of the foregoing provisions, the Court “reject[ed] defendants’ contentions that the reconciliation provisions [were] convoluted or that the agreement provide[d] plaintiff with sole discretion to reconcile, so as to render the provisions illusory.”[13] 

Under the second factor, the Court found that the “agreement did not have a finite term or payment schedule.”[14] “Indeed,” observed the Court, “‘the term of the agreement was not finite inasmuch as the amount of the [weekly] payments [made by the entity defendants] could change as a consequence of the application of the agreement’s reconciliation provisions.’”[15] 

With respect to the third factor, the Court noted that the “agreement stated that the entity defendants ‘going bankrupt or going out of business, or experiencing a slowdown in business, or a delay in collecting [their] receivables, in and of itself, [did] not constitute a breach of this Agreement.’”[16] Thus, concluded the Court, “plaintiff did not have recourse in the event that the entity defendants declared bankruptcy.”[17] 

Accordingly, the Court found “that the agreement was a revenue purchase agreement and not a usurious loan.”[18]

Takeaway

NewCo Capital reinforces the principle that, under New York law, the threshold question in any usury analysis is whether the transaction is a loan. Labels are not dispositive; courts will look to the economic reality of the arrangement and, in particular, whether the funder is absolutely entitled to repayment under all circumstances. If repayment is contingent on the merchant’s future receivables and the funder assumes a genuine risk of nonpayment, the transaction is not a loan and therefore falls outside New York’s usury laws.

The decision also reaffirms the focus on the three factors used to evaluate whether financial arrangements, such as merchant cash advances and revenue-purchase agreements, are loans: (1) the existence of a meaningful reconciliation provision that adjusts payments to actual receipts; (2) the absence of a finite term or fixed repayment schedule; and (3) the funder’s lack of recourse if the merchant’s business fails or files for bankruptcy. Where these indicators are real and enforceable, not merely illusory, the agreement will be characterized as a purchase of future receivables rather than a loan.

Importantly, NewCo Capital demonstrates that courts will reject attempts to invalidate merchant cash advance agreements based on claims that reconciliation provisions are overly complex or discretionary when the contractual language requires the funder to adjust remittances to reflect the merchant’s true revenue stream.

Finally, the case serves as a reminder that even where a transaction results in a very high effective rate of return, that fact alone does not establish usury. As New York courts repeatedly emphasize, there can be no usury without a loan. Consequently, parties challenging financing transactions, such as merchant cash advance agreements, must first establish the existence of an absolute repayment obligation before a court will even reach the question of whether the return charged exceeds New York’s civil or criminal usury limits.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice.

Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. ___________________________________

[1] Abir v. Malky, Inc., 59 A.D.3d 646, 649 (2d Dept. 2009); see also Penal Law § 190.40.

[2] Paycation Travel, Inc. v. Glob. Merch. Cash, Inc., 192 A.D.3d 1040, 141 (2d Dept. 2021); LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 666 (2d Dept. 2020).

[3] Intima-Eighteen, Inc. v. Schreiber Co., 172 A.D.2d 456, 457-458 (1st Dept. 1991) (internal quotation marks and citations omitted).

[4] LG Funding, 181 A.D.3d at 665.

[5] Id. (citations omitted).

[6] See Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 326 (2021); Davis v. Richmond Capital Group, LLC, 194 A.D.3d 516, 517 (1st Dept. 2021).

[7] True Bus. Funding, LLC v. Guerrero A Constr. Corp., 239 A.D.3d 787, 788 (2d Dept. 2025) (internal quotation marks omitted); see Adar Bays, 37 N.Y.3d at 334.

[8] Samson MCA LLC v. Joseph A. Russo M.D. P.C./IV Therapeutics PLLC (appeal No. 2), 219 A.D.3d 1126, 1127 (4th Dept. 2023) (internal quotation marks omitted); see Bridge Funding, 240 A.D.3d at 1188; LG Funding, LLC v. United Senior Props. of Olathe, LLC, 181 A.D.3d 664, 665-666 (2d Dept. 2020).

[9] Bridge Funding, 240 A.D.3d at 1188 (internal quotation marks omitted); see Kapitus Servicing, Inc. v. Suburban Waste Servs., Inc., 246 A.D.3d 661, 661 (1st Dept. 2026); True Bus. Funding, 239 A.D.3d at 788; Samson MCA, 219 A.D.3d at 1128.

[10] Slip Op. at *1, citing Tapp Partners, LLC v. Wall Sections Inc., 244 A.D.3d 1727, 1728 (4th Dept. 2025); cf. Bridge Funding, 240 A.D.3d, at 1189-1190. 

[11] Id. at *2.

[12] Id.

[13] Id. (citation omitted).

[14] Id.

[15] Id., citing Bridge Funding, 240 A.D.3d at 1189 (internal quotation marks omitted).

[16] Id., citing Samson MCA, 219 A.D.3d at 1128.

[17] Id., citing id.

[18] Id. at 1-2, citing Bridge Funding Cap LLC, 240 A.D.3d at 1188-1189; True Bus. Funding, LLC, 239 A.D.3d at 788; Samson MCA, 219 A.D.3d at 1128.