Accordingly, when cash flow is tight and traditional loans and lines of credit are exhausted, sometimes contractors turn to a factor (a funding entity that purchases a contractor’s future receivables). Unfortunately, the cost of this type of funding is expensive (and makes loan sharking seem like a bargain). In the recent case of Novus Capital Funding v M. Franklin Concrete Construction, a court reminds us of the differences between a usurious loan (a loan with illegally high interest) and a permissible sale of receivables.  

Background

In January of 2023, Novus Capital Funding and M. Franklin Concrete Construction (and its principal, Mitchell Franklin) entered into an agreement whereby Franklin Concrete agreed to sell 12% of its future revenue, up to $22,485, to Novus for $15,000. Two months later, when Novus demanded payment, Franklin Concrete refused (and Franklin refused to pay on his personal guaranty), arguing that the agreement was unenforceable because it was a usurious loan. (If a loan, the interest here would amount to 200% per annum.) Novus sued Franklin Concrete on the contract, and Franklin personally on the guaranty. Franklin Concrete and Franklin answered and asserted counterclaims, alleging that the loan was usurious. Novus moved for summary judgment on the breach of the receivables-sale agreement, and Franklin Concrete and Franklin opposed, claiming the loan was usurious and, therefore, unenforceable.

Decision

The court granted Novus’ motion, finding that the arrangement was for the sale of future receivables, and was not a loan. In doing so, the court noted that it had to analyze the agreement’s terms, and not just its name, to determine whether it met the three-part test for a valid sale of receivables.

The first part of the test is to determine whether there is a reconciliation provision, which permits the seller to seek an adjustment of the amount to be repaid if those receivables are not paid back to the seller, or if there is some other downturn in cashflow. If there is a reconciliation provision, that militates toward finding a sale, and not a loan.

The second part of the test is whether the agreement is for a non-finite term, which would require repayment regardless of the time it takes. If the term is non-finite, that indicates a sale; as opposed to a fixed maturity date, which indicates a loan.

The third part of the test is to determine whether the seller’s declaration of bankruptcy would be considered a breach of the agreement. Or, stated differently, whether the factor is subjecting itself to the seller’s business risks. If a bankruptcy would excuse the obligation, then it is considered a sale and not a loan.

Here the court found that the agreement did contain a reconciliation provision; it was for a non-finite term, and Franklin Concrete’s bankruptcy would excuse the obligation. Accordingly, the court found that the agreement was for a sale of receivables and not a loan. As such, the defendants’ usury argument was not applicable, and Novus was entitled to judgment notwithstanding such counterclaims and defenses.

Comment

The decision to seek funding by selling receivables is often the proverbial “last exit before toll.” However, there are times when that sort of funding means the difference between insolvency and living to work another day. Given the extremely high cost of such financing—Franklin Concrete’s financing would have amounted to a 200% annual interest rate had it been a loan—it is tempting, when sued by the factor, to assert a usury defense. However, such a defense is only available when the arrangement is truly a loan and not a sale.

Should you have any questions about whether your financing arrangement is legal—and the effect that New York’s contractor trust fund statutes may have on the arrangement—a quick consultation with counsel can often answer those questions, and you will be able to appreciate the ramifications of the agreement you are about to enter.

About the authors: Thomas H. Welby, Esq., P.E., is general counsel to the CIC and the BCA, and is founder of and senior counsel to Welby, Brady & Greenblatt, LLP; Gregory J. Spaun, Esq., is general counsel to the Queens and Bronx Building Association and a partner with the firm.

Published: August 15, 2025.