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42 Emory Bankr. Dev. J. 1 (2026)

handle is hein.journals/bnkd42 and id is 1 raw text is: DESPERATION FINANCE: MERCHANT CASH ADVANCES IN BANKRUPTCY AND BEYOND Kara Bruce* ABSTRACT Over the last several years, Merchant Cash Advances ('MCAs) have risen in prominence as aform of short-term financing for distressed small businesses. MCA transactions are distinct from most small-business lending because they are not structured as loans at all. Rather, in exchange for a lump sum of cash, the merchant purports to sell to the funder an unidentified percentage of its future receipts or receivables. This structure allows funders to sidestep the application of lending regulations and usury protections, but it strains the foundations of commercial law and generates a host of interpretive challenges. Bankruptcy, district, and circuit courts across the nation are grappling with the true nature ofMCA transactions to determine what rights in the underlying receivables are transferred and when that transfer occurs. These issues rise in prominence if a merchant seeks bankruptcy protection, as the extent of the estate's interest in property-and by extension the application of any number of bankruptcy provisions hangs in the balance. This essay provides a comprehensive analysis ofMCA agreements and other forms of revenue-based financing. Drawing from a robust literature involving recharacterization offinancial transactions, this essay advances an analytical framework for evaluating the nature of MCA transactions. It explores how recharacterization affects both bankruptcy and non-bankruptcy entitlements and offers commentary on related issues faced by courts. * The author thanks Hons. Paul Baisier, Ashley Edwards, Benjamin Kahn, Pamela McAfee, and Teresa Pearson, as well as the late Juliet Moringiello, Richard Cook, John Coyle, David Cox, Melissa Jacoby, Christopher Odinet, Chrystin Ondersma, Stephen Sepinuck, Andrea Tosato, and Jill Walters for helpful conversations and feedback on this project. Judge Baisier coined the phrase desperation finance. The participants at the Federal Judicial Center's Annual Bankruptcy Seminars in April 2022 and April 2025, the Western District of NC Bankruptcy Workshop in May 2025, the Middle District of NC Bankruptcy Seminar in May 2025, the Judge Joe Lee Bankruptcy Workshop in June 2025, and several webinars have challenged and developed my thinking on these topics, and I look forward to more discussions to come. I also thank the University of North Carolina School of Law for support of my research, as well as the UNC law library, particularly Ellie Campbell at the LibRA program, for providing research support.