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Usury
Also called usurious, usury law, interest rate limits.
Charging interest above what state law permits on a loan; the doctrine applies to loans, which is why the loan-versus-purchase characterisation of a merchant cash advance is the whole legal question.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
Why the characterisation decides everything
Usury statutes cap interest on loans. A loan, in the classic formulation, requires an absolute obligation to repay — the money comes back whatever happens. A purchase of an asset does not create that obligation; the buyer takes the risk that the asset underperforms. Merchant cash advance agreements are drafted as purchases of a specified percentage of future receivables, with the funder's recovery contingent on the merchant actually generating receipts. If that is what the transaction really is, usury caps on loans do not reach it.
What courts have looked at
Where the question has been litigated, courts have generally examined substance rather than the label on the document. Recurring factors in the analysis include: whether there is a genuine reconciliation provision letting remittance track actual receipts; whether the agreement has a fixed maturity date by which the full amount must be repaid regardless of receipts; and whether the merchant's failure or bankruptcy, absent fraud or a breach of covenant, is an event of default — because if going out of business through no fault triggers liability, the funder has not taken the risk it claims to have taken. Reconciliation that exists on paper but is unusable in practice has drawn attention on this point.
Where those features are genuinely present, agreements have generally been treated as purchases and outside loan usury analysis. Where the agreement is a loan wearing a purchase label — fixed term, unconditional repayment, no meaningful reconciliation — some courts have recharacterised it and applied lending law to it.
This is state law and it is moving
Usury is governed state by state. The caps themselves, whether they apply to corporate or business borrowers at all, whether criminal usury provisions apply separately from civil ones, what remedy follows a violation, and how a court will treat a receivables purchase all vary by jurisdiction. Several states have also enacted commercial financing disclosure statutes and provider registration regimes, which are separate from usury but part of the same direction of travel. Case law has continued to develop and legislatures have continued to act. There is no settled national answer, and a position that is right in one state may be wrong in the next.
Choice-of-law clauses in these agreements try to fix the applicable state in advance. Whether a court honours that choice is itself a question of the forum's law and its public policy.
Where this one catches people
Two mirrored errors. Funders and brokers say "it is not a loan, so usury cannot apply" as though the label settles it — it does not, because the analysis looks at the substance of the agreement. Merchants and their advisers say "the annualised cost is enormous, therefore this is illegal" — which skips the characterisation question entirely, and in most litigated cases the characterisation is where it ends. Neither position is a legal opinion, and the answer depends on the specific contract and the specific state.
Where you will meet this term
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Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
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Usury requires a loan; where there is no loan there can be no usury, which is why the purchase-versus-loan characterisation decides the question
definition"The rudimentary element of usury is the existence of a loan or forbearance of money, and where there is no loan, there can be no usury, however unconscionable the contract may be"
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Courts weigh three factors — a reconciliation provision, a finite term, and recourse on the merchant’s bankruptcy — in deciding whether repayment is absolute or contingent
definition"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"
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A reconciliation provision the funder is not obliged to honour has been treated as evidence of an absolute repayment obligation rather than a contingent one
definitionThe court noted the plaintiff was "under no obligation" to reconcile payments to actual sales, treating this as evidence of an absolute loan obligation rather than contingent repayment.
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Usury caps are set by state statute and carve out larger commercial transactions, so the ceiling is a state-law question rather than a national one
definition"The rate of interest...shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law"; criminal usury under Penal Law §§ 190.40 and 190.42 does not reach loans of $250,000 or more on the same terms.
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Several states have enacted commercial financing disclosure statutes separate from usury — New York’s sits in article 8 of the Financial Services Law
definitionArticle 8 is headed "COMMERCIAL FINANCING" and contains § 803 sales-based financing disclosure requirements, § 806 factoring transaction disclosure requirements and § 812 penalties.
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Several states also operate provider registration regimes — Virginia requires sales-based financing providers and brokers to register
definition"every sales-based financing provider and sales-based financing broker (i) shall register with the Commission"
Usury — common questions
What does usury mean?
Charging interest above what state law permits on a loan; the doctrine applies to loans, which is why the loan-versus-purchase characterisation of a merchant cash advance is the whole legal question.
Where does usury catch people out?
Two mirrored errors. Funders and brokers say "it is not a loan, so usury cannot apply" as though the label settles it — it does not, because the analysis looks at the substance of the agreement. Merchants and their advisers say "the annualised cost is enormous, therefore this is illegal" — which skips the characterisation question entirely, and in most litigated cases the characterisation is where it ends. Neither position is a legal opinion, and the answer depends on the specific contract and the specific state.
Is usury the same as an interest rate?
Usury 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 usury apply to?
Merchant Cash Advance, Working Capital, Revenue-Based Financing.
Is there a worked example of usury?
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 usury?
Annual percentage rate, Cash advance, Choice of law, Reconciliation, Specified percentage.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
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.