Someone lends money to a business. The note carries 18%. A year later the borrower’s lawyer says the word usury, and everybody stops breathing.
Usually nothing happens. Occasionally something dramatic happens. The difference is almost never the rate — it is the size of the loan, the purpose of the loan, and whether it was in writing.
Minnesota’s usury statute is old, short, and structured around exemptions that swallow most commercial lending. It is worth understanding precisely, because when it does apply the remedy is not a rate adjustment. It is forfeiture.
What is the legal rate of interest in Minnesota?
Minn. Stat. § 334.01, subd. 1, still written in the currency of 1900:
The interest for any legal indebtedness shall be at the rate of $6 upon $100 for a year, unless a different rate is contracted for in writing. No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money, goods, or things in action, than $8 on $100 for one year.
Two numbers, doing two different jobs:
- 6% is the default where the parties did not contract for a rate in writing.
- 8% is the ceiling where they did — unless an exemption applies, and it usually does.
The same subdivision carries three rules that decide real cases:
- No compounding. “[I]nterest shall not be compounded, but any contract to pay interest, not usurious, upon interest overdue, shall not be construed to be usury.”
- Default-rate escalators are dangerous. “Contracts shall bear the same rate of interest after they become due as before, and any provision in any contract, note, or instrument providing for an increase of the rate of interest after maturity, or any increase therein after making and delivery, shall work a forfeiture of the entire interest.” That is a rule about rate escalation on default, and it is written into a great many privately drafted notes by people who have never read it.
- Extensions are treated separately. The escalator rule does not reach notes bearing no interest before maturity, or agreements extending maturity that provide for an increased post-maturity rate — but “[a]ny agreement which extends maturity date of any contract, note or instrument shall not provide for an increased rate of interest in excess of $8 on $100 for one year.”
The exemption that does most of the work: $100,000
Minn. Stat. § 334.01, subd. 2 is the sentence that makes commercial lending in Minnesota possible:
Notwithstanding any law to the contrary, except as stated in section 58.137, and with respect to a conventional loan or contract for deed, section 47.20, subdivision 4a, no limitation on the rate or amount of interest, points, finance charges, fees, or other charges applies to a loan, mortgage, credit sale, or advance made under a written contract, signed by the debtor, for the extension of credit to the debtor in the amount of $100,000 or more, or any written extension and other written modification of the written contract. The written contract, written extension, and written modification are exempt from the other provisions of this chapter.
Read the conditions, because each one is a way to lose the exemption:
- $100,000 or more. A $95,000 note is not exempt under this subdivision.
- A written contract. An oral arrangement, however large, is not.
- Signed by the debtor. An unsigned term sheet is not a signed written contract.
- Extensions and modifications must also be written. A handshake extension of an exempt note is exactly the kind of thing that turns a clean deal into an argument.
Note what the exemption covers: not just the interest rate, but “points, finance charges, fees, or other charges.” And note that it exempts the transaction “from the other provisions of this chapter” — not merely from the rate cap.
Two carve-outs are named in the text and should be checked in any real-estate transaction: § 58.137 and, for a conventional loan or contract for deed, § 47.20, subd. 4a.
Business and agricultural loans under $100,000: a floating cap
Between the 8% general cap and the $100,000 exemption sits Minn. Stat. § 334.011, subd. 1, which is the provision most often overlooked in small-business lending:
Notwithstanding the provisions of any law to the contrary a person may, in the case of a contract for the loan or forbearance of money, goods, or other things in action in an amount of less than $100,000 for business or agricultural purposes, charge interest at a rate of not more than 4-1/2 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District encompassing Minnesota.
A floating cap, not a fixed one. The permitted rate moves with the referenced federal discount rate, and the ceiling has to be computed as of the date the loan was made.
The subdivision defines its own terms. “Business” means “a commercial or industrial enterprise which is carried on for the purpose of active or passive investment or profit.” “Agricultural” is defined expansively — production, harvest, marketing, transportation, processing, or manufacture of agricultural products, including horticultural, viticultural, and dairy products, livestock, poultry, forest products, fish and shellfish, “and any and all products raised or produced on farms.”
And one hard limit: “No loan shall be made pursuant to this subdivision if the proceeds of the loan are used to finance the purchase or maintenance of real estate used principally for the borrower’s residence.”
Subdivision 3 is the lender’s friend. “If the rate of interest charged is permitted by this section at the time the loan was made, that rate of interest does not later become usurious because of a fluctuation in the federal discount rate.” Compute it once, correctly, at closing.
What happens when a loan is usurious
This is where usury stops being technical.
Under § 334.011, subd. 2 — business and agricultural loans:
If a greater rate of interest than that permitted by subdivision 1 is charged then the entire interest due on that note, bill or other evidence of debt is forfeited. If the greater rate of interest has been paid, the person who paid it may recover in a civil action an amount equal to twice the amount of interest paid.
All of the interest. Not the excess — all of it. And double recovery of interest already paid.
Under § 334.03 — the general rule:
All bonds, bills, notes, mortgages, and all other contracts and securities … whereupon or whereby there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of any money, goods, or things in action than prescribed, except such instruments which are taken or received in accordance with and in reliance upon the provisions of any statute, shall be void except as to a holder in due course.
Three qualifiers in that same section that regularly decide cases:
- Clerical error is not usury. “No merely clerical error in the computation of interest, made without intent to avoid the provisions of this chapter, shall constitute usury.”
- Monthly and advance computation is safe. “Interest at the rate of 1/12 of eight percent for every 30 days shall not be construed to exceed eight percent per annum,” and payment of interest in advance for a year or less at a rate not exceeding eight percent is not usury.
- A holder in due course is protected — but the original holder is not. “[W]here the original holder of a usurious note sells the same to an innocent purchaser, the maker thereof, or the maker’s representatives, may recover back from the original holder the amount of principal and interest paid on the note.”
Under § 334.02 — recovering interest already paid, on a two-year clock:
Every person who for any such loan or forbearance shall have paid or delivered any greater sum or value than in section 334.01 allowed to be received may … recover in an action against the person who shall have received the same … the full amount of interest or premium so paid, with costs, if action is brought within two years after such payment or delivery.
Both § 334.02 and § 334.03 exclude regulated lenders. Neither applies “when the loan or forbearance is made by a lender and the lender is subject to section 47.59 or 48.196 or chapter 56,” with “lender” defined to include state and federally chartered banks and savings institutions, credit unions, industrial loan and thrift companies under chapter 53, licensed lenders under chapter 56, and HUD- or VA-approved mortgagees. Usury is largely a private-lending doctrine in Minnesota, not a bank-lending one.
One narrow provision worth knowing: mission lending
Minn. Stat. § 334.011, subd. 5 carves out a path for nonprofit business lenders. A 501(c)(3) organization that makes business-purpose loans “to individuals who are disadvantaged or otherwise unable to access standard sources of business credit,” paired with education, training, or counseling at no extra charge or at cost, may lend up to $10,000 at a rate not exceeding 16 percent per year, with an origination fee not exceeding two percent of principal.
The compliance conditions are real: written notice to the commissioner of commerce before beginning, on a prescribed form, with a copy to the commissioner of employment and economic development, and an annual report to both.
The practical checklist
If you are lending:
- Get to $100,000 if you legitimately can, in a written contract signed by the debtor. That single fact exempts the transaction from the chapter.
- If you are under $100,000, confirm the purpose. Business or agricultural purposes get § 334.011’s floating cap. Consumer purposes do not.
- Compute the § 334.011 ceiling as of the closing date and keep the computation in the file. Subdivision 3 protects you afterward.
- Never finance a borrower’s principal residence under § 334.011. The subdivision forbids it by its terms.
- Put every extension and modification in writing. An oral extension can cost the exemption.
- Look hard at default-rate escalators. Under § 334.01, subd. 1, a provision increasing the rate after maturity “shall work a forfeiture of the entire interest,” subject to the stated exceptions.
- Do not paper an interest charge as a “fee” to get around the cap. The statute reaches any greater sum taken “directly or indirectly … in money, goods, or things in action, or in any other way.”
If you are borrowing, or defending a note:
- Start with the amount and the date. A written, signed extension of credit of $100,000 or more ends the inquiry under subd. 2.
- Then the purpose. Business or agricultural, under $100,000, points to § 334.011 and its floating cap.
- Then the identity of the lender. A bank, credit union, chapter 53 or chapter 56 lender, or approved mortgagee is outside §§ 334.02 and 334.03.
- Then the arithmetic, including fees, points, and anything else taken for the loan or forbearance.
- Watch the two-year window in § 334.02 for recovering interest already paid.
Usury is rarely the whole case, and it is frequently a very good counterclaim. It pairs naturally with the questions that arise when the lender moves to collect — personal guaranty enforcement (see our personal guaranty guide) and the commercial reasonableness of a collateral disposition (see our Article 9 deficiency guide).
The observation worth keeping
Minnesota’s usury statute reads like a nineteenth-century artifact because it substantially is one — “$8 on $100 for one year” is not the vocabulary of modern credit. The Legislature did not modernize the cap so much as build doors around it: a size exemption, a purpose exemption, a lender exemption.
The result is a doctrine that almost never reaches institutional lending and lands hardest on exactly one population — private lenders papering their own notes. The friend financing a startup. The seller carrying paper on a business sale. The investor writing a bridge loan on a form found online.
Those are the notes that get written at 18% for $60,000 on a handshake extension. And those are the notes where “the entire interest due … is forfeited” is a sentence somebody eventually reads out loud.
Madgett Law, LLC structures and documents private lending for Minnesota businesses and investors, and litigates usury, forfeiture, and enforcement disputes on privately held notes. If you are about to lend, the exemption analysis belongs in the paperwork, not in the lawsuit. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 334.01 (rate of interest — subd. 1, the $6 default and $8 ceiling per $100 per year, the no-compounding rule, the post-maturity escalation forfeiture, and the limit on extension agreements; subd. 2, the exemption for written contracts signed by the debtor extending credit of $100,000 or more, and the § 58.137 and § 47.20, subd. 4a carve-outs; subd. 3, ERISA plan loans); Minn. Stat. § 334.011 (business and agricultural loans — subd. 1, the floating cap of 4-1/2 percent over the 90-day commercial paper discount rate at the Federal Reserve Bank in the district encompassing Minnesota, the statutory definitions of “business” and “agricultural,” and the prohibition on financing the borrower’s principal residence; subd. 2, forfeiture of the entire interest and recovery of twice the interest paid; subd. 3, no later usury from federal discount rate fluctuation; subd. 5, charitable organization loans up to $10,000 at up to 16 percent with a two percent origination fee, and the notice and annual reporting conditions); Minn. Stat. § 334.02 (recovery of usurious interest within two years; exclusion of lenders subject to § 47.59, § 48.196, or chapter 56); Minn. Stat. § 334.03 (usurious contracts void except as to a holder in due course; clerical error; the 1/12-of-eight-percent and advance-payment computations; recovery from the original holder; the same lender exclusion) (Minnesota Office of the Revisor of Statutes). The permitted rate under § 334.011 floats and must be computed against the referenced federal rate in effect when the loan is made. This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. No outcome is promised or implied.