- 1Gage says Spin Capital v Bridgelink gives guidance on two unsettled LG Funding factors.
- 2The court treated payment adjustments in response to receipts as supporting a contingent obligation.
- 3It focused on whether bankruptcy triggers a default, not on funder rights in a bankruptcy case.
Robert F. Gage, a partner in the Michigan office of Hudson Cook, LLP, argues in a guest column that a recent New York appellate ruling gives revenue-based financing providers useful guidance on how to avoid recharacterization as loans. The decision is Spin Capital, LLC v Bridgelink Engineering, LLC, issued by the Appellate Division, Second Department, on April 15, 2026 (N.Y. Slip Op. 02296, 2026 WL 1017492).
The LG Funding test
Gage notes that a properly structured RBF transaction should not be subject to state usury laws, and that funders rely on court decisions to know when a deal will be treated as a disguised loan. The leading framework is the LG Funding test, named for LG Funding, LLC v. United Senior Props. of Olathe, LLC. Under it, a transaction is a loan if the funder is absolutely entitled to repayment in all circumstances, but not if repayment is contingent. Courts look at three factors:
- whether the agreement gives the merchant a right to reconciliation that adjusts payments to a specified percentage of revenue;
- whether the agreement has a finite term; and
- whether the funder has recourse if the business declares bankruptcy.
Reconciliation: adjustments versus refunds
Gage describes reconciliation as a process leading to an adjustment of future payments, a refund of excess payments, or both. Funders generally prefer adjustments, and the industry has debated whether the test requires refunds. Courts have given little explicit guidance.
In Spin Capital, the court noted that the agreement allowed remittances to be adjusted for fluctuations in receipts and that the adjustments rendered the term indefinite. Gage reads that as suggesting adjustments alone can satisfy the first factor and, at the same time, the second. He says this should reassure funders who offer adjustments only, without disadvantaging those whose contracts also provide refunds.
Recourse in bankruptcy
The third factor, Gage says, has been the most confusing. Some courts have suggested that taking collateral gives a funder recourse in bankruptcy because a secured creditor has rights there. He calls that reading unpersuasive, since it would require RBF providers to disclaim every right in a bankruptcy.
His preferred view is that the factor refers to contractual rights triggered by a bankruptcy, such as acceleration of the balance upon default, rather than rights under bankruptcy law. In Spin Capital, the court observed that the agreement had no provision making a bankruptcy declaration an event of default. Gage reads that as confirming that what matters is whether bankruptcy triggers acceleration. He says contracts that make bankruptcy an event of default could be recharacterized as loans, and that uncertainty persists partly because of some federal court opinions he considers poorly reasoned.
His takeaway
Gage calls the ruling a win for Spin Capital and says that if more courts follow its approach, funders will have more certainty when structuring RBF to withstand a recharacterization challenge.
Source reporting: deBanked.
