Merchant Agreements styled “merchant cash advances” or “receivables purchases” are facilities which provide debtors with immediate cash (and hence liquidity to operate) in exchange for the proceeds from future accounts receivable, which are often described as being sold to the merchant lender. The receivables “sold” to this lender usually exceed the amount of cash paid, which creates the lender/purchaser profit. The agreements can take two primary forms: either a sale or a loan against the receivables. It can often difficult to discern which transaction actually occurred, i.e. a true sale or a loan transaction.
In In re Shoot the Moon, LLC, 635 B.R. 797 (Bankr.D.Mont.2021), the court dealt with the issue of whether the merchant agreement at issue represented a true sale of future accounts receivable or a loan secured by future accounts receivable. In evaluating this issue, the court examined eight factors outlined by Robert D. Aicher and William J. Fellerhoff in their article Characterization of a Transfer of Receivables as a Sale or a Secured Loan Upon Bankruptcy of the Transferor, 65 Am.Bankr.L.J. 181, 186-04 (1991). These factors are:
(1) whether the buyer has a right of recourse against the seller;
(2) whether the seller continues to service the accounts and commingles receipts with its operating funds;
(3) whether there was an independent investigation by the buyer of the account debtor;
(4) whether the seller has a right to excess collections;
(5) whether the seller retains an option to repurchase accounts;
(6) whether the buyer can unilaterally alter the pricing terms;
(7) whether the seller has the absolute power to alter or compromise the terms of the underlying asset; and
(8) the language of the agreement and the conduct of the parties.
Shoot the Moon noted that the consideration which overlays and unites the above factors is how the parties allocated risk. It stated that “[a] sale typically occurs when the risk of loss from the purchased assets passes to the buyer – a gamble usually reflected in the purchase price. Conversely, in a disguised loan, the parties may employ various methods to allocate risk – the putative seller typically remains exposed to the underlying receivables and may grant the putative buyer recourse to sources of recovery beyond the receivables.”
In applying the Aicher/Fellerhoff factors, the court concluded that the Merchant Agreement at issue in its case was a loan. First, it noted that the security interests granted in the Merchant Agreement were significantly broader than those associated with a sale and much more akin to those associated with a loan. For instance, the agreement purported to secure the debtor’s “payment and performance obligations to” the lender with “a security interest in all * * * payment and general intangibles (including but not limited to tax refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, trade secrets, customer lists, licenses, [etc.]); goods; inventory; equipment and fixtures * * *, and all proceeds of the foregoing.” Id. at 814-15. The court stated that “[o]utside the context of a secured loan, there is no reason why [the lender] should receive and perfect security interests in assorted assets other than the purchased receivables. Id. at 815. This evidence alone weighed powerfully in favor of classifying the transactions as loans. Id. at 816.
The court further noted that the lender’s financing statements contained another revealing indicator that the Merchant Agreements documented secured loans: they identify each applicable Shoot the Moon entity as a “debtor.” “This is telling because [the lender] could have easily referred to each as a “seller” or words of similar import if [the lender] deemed such designation more accurate.” Id. at 815.
Second, the court noted that the transaction documents give the lender rights and recourse against property in addition to the collateral package. It noted that the documents provided a broad personal guaranty by Shoot the Moon’s principal that “is an absolute, primary, and continuing guaranty of payment and performance” It also included an affidavit of confession of judgment whereby both the Shoot the Moon entity and the personal guarantor confess to a generalized judgment in a fixed sum equal to the total amount to be paid to the lender plus legal fees and “interest at the rate of 16% per annum.” Id. at 816. Further, the continuing requirement that the Shoot the Moon entity provide the lender with financial statements within five business days of the lender’s request, was evidence of a loan, rather than a sale. The court concluded:
Although none of these features is dispositive alone, their collective effect weighs heavily in favor of characterizing the transactions as loans. As a whole, they provide [the lender] with at least conditional recourse and expanded legal rights against the Shoot the Moon entities and the personal guarantors. Plus, they allocate great risk to the Shoot the Moon counterparty while protecting [the lender] with much more than just the receivables. [The lender’s] panoply of rights, remedies, and potential control is highly unusual in the context of an asset sale. Such an overall arrangement is consistent with a debtor-creditor relationship, not a seller-buyer relationship.[1]
Third, the court noted that the parties’ course of performance also reflected a debtor-creditor relationship. In this regard, it noted that the parties often discussed the transactions in vernacular reserved for debtor-creditor relationships, such as “loans” with “terms” and “balances.” Further, the parties “stacked” or “rolled” funds from one transaction to the next. This practice committed a portion of the proceeds from a later transaction to satisfy the outstanding obligations of earlier transactions, effectively refinancing the earlier transactions. The court stated that this made sense only in the context of a loan. Id. at 818-19. Although theoretically possible, the transaction steps in the sale context would require the Shoot the Moon entities to rebuy future receivables previously sold to the lender only to turn around and immediately resell the same receivables, and others, back to the lender. Such circuitous behavior is nonsensical.
In In re Anadrill Directional Services Inc., 2026 WL 234908 (Bankr.S.D.Tex. Jan. 28, 2026), the court stated that merchant agreements can be loans “if they impose an absolute obligation to repay and shift virtually all risk to the borrower, or “seller” of the future receivables.” This is because in a true sale of future receivables, the lender, or “buyer,” bears the risk that the purchased asset will be uncollectible. Id. at *4.
When determining whether the right to repayment is absolute, New York courts weigh three factors: “(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.” In addition, courts may consider whether there are default provisions entitling the lender to immediate repayment, and whether the agreement allows collection on a personal guaranty in the event of default or bankruptcy.[2]
Here, when looking at the Agreement’s substance, the court noted that there were several aspects of it that indicate it is a loan. First, the alleged purchaser did not appear to be bearing the risk of the Agreement because it retained the ability to sweep 100% of alleged seller’s income via ACH. This shows that purchaser had control over the funds and is effectively requiring full repayment regardless of business performance. Furthermore, the parties agreed that seller must enter a confession of judgment if it defaults, which shows that alleged purchaser could pursue recovery even if ACH defaults. The purchaser also took a security interest in all of the seller’s assets, further mitigating the former’s risk. Additionally, the agreement stipulated that the owner of the seller agreed to personally guarantee the debt. Therefore, purchaser had methods to recover even if seller defaulted, which established that purchaser was actually a lender, and was not bearing the risk of the Agreement. These features were hallmarks of a disguised loan rather than a true sale of future receivables. Id.
The court in In re R&J Pizza Corporation, 2014 WL 12973408 (Bankr.E.D.N.Y. Oct. 14, 2014) faced a similar issue, and it too considered the eight factors raised by Aicher and Fellerhoff. Here, however, it found that a true sale occurred. First, it noted that the Purchase Agreements consistently refer to the transaction as a “purchase” and “sale” and lender and the debtor as “Buyer” and “Seller” respectively. Id. at *3. Second, the Purchase Agreement did not provide for recourse against the debtor for non-collection. Thus, if the debtor ceased operations, lender had no right to collect any amounts from the debtor, regardless of the amount of credit card receivables that have been collected and remitted to lender at the time. Id. at *4. With respect to the personal guaranties, it noted:
Moreover, the personal guarantee of the Debtor’s principal provided in the Purchase Agreement is effective only upon a certain limited circumstances including, misrepresentation of fact, a termination of the credit card processor before MCC receives the Purchased Amount, or a sale by the Debtor of substantially all of its assets without notice to MCC.[3]
The court noted that the Purchase Agreement expressly provided that the debtor had no right to repurchase any of the purchased Accounts, therefore, this factor supported the conclusion the transaction was a true sale. Further, under the Purchase Agreement, the debtor did not retain any servicing rights or any rights to collect the proceeds of the purchased Accounts. To the contrary, the Purchase Agreement expressly required the debtor to utilize a credit card processor designated by the lender as its sole processor. Id. at *5. And under the Purchase Agreement, the lender had no right to alter the price terms of the purchase. Id. at *6. Therefore, in conclusion, this transaction was a true sale.
[1] Id. at 817.
[2] Id. at *4.
[3] Id. at *4.
Matthew T. Gensburg
mgensburg@gcklegal.com