Welcome to Delancey Street. We are a nationwide business debt settlement company that helps business owners all across the country escape predatory merchant cash advance debt and the harsh ramifications when you default. This article is about UCC filings and how they hurt businesses, and more importantly, how to remove them.
UCC filings and your business assets
A UCC-1 is a public notice that an MCA lender is claiming an interest in your business assets. For MCA firms, what that really means is your receivables and future cash. A UCC-1 does not mean that you sold the business, but other lenders are going to see it and then base their actions on it.
If you took a merchant cash advance, you likely have a UCC filing. Most owners miss it until it starts hurting their company. Now let’s talk about how it hurts and what removes the UCC filing.
Bank loans
First things first, it can block a bank loan, an SBA loan, or a line of credit. This is the most common harm most business owners are unaware of. A bank or SBA lender is going to search your business name and state records before approving your loan. If there’s an active MCA filing, especially a blanket filing on all of the business assets, it’ll often end the review.
The new lender would be second in line behind the first MCA filer. Most banks will never do this. They dislike second position. SBA lenders are strict and usually demand a clear first position. A narrow filing on specific receivables is less alarming for them than a blanket filing on assets, equipment, and inventory. Many MCA filings use broad language, and that language will scare the next lender.
Receivables and future cash
The second thing that is a problem is it’ll tie up your receivables and future cash. MCAs are not normal loans. They’re not loans at all from a legal perspective. You sold a portion of your future receivables for cash upfront. The UCC filing is what lets the entire world know that you have an MCA in place. Part of your future cash is already locked up and has a lender’s name on it. That squeezes cash while daily and weekly debits keep pulling from your bank account.
It also will block easy fixes like factoring invoices or getting a receivables line. The MCA funder has already taken those invoices and claimed them. Often many will walk away. Others will fund only if the MCA firm steps aside from those invoices and takes a second position lien. That is called subordination or partial release. This will take time and leverage. Until then, one funder, the MCA lender, is controlling your incoming cash, legally speaking.
Stacking and higher-cost debt
The third issue is that it can trigger stacking and higher-cost debt. Once the filing is on record, your options narrow, and stacking is usually what most business owners turn to. Stacking means adding a second, third, or fourth advance on top of the first one you already have.
The next funder who sees it behind the first filer will often charge more. That’s because they believe that they are in a higher risk position than the first lender. Also, due to the fact that the first lender has already claimed all of your receivables by the blanket UCC lien they filed, therefore they are higher in priority. And in the event of a default, they would have first claims versus the second or third or fourth position lender.
Often payments will pile up, your debits are growing, and now your cash thins out even more. To a normal lender checking the record, your business looks even riskier now because you’ve got multiple stacks of MCAs. So often what you end up doing is returning to another MCA lender because that door is still open. One filing will lead to worse terms, and worse terms will lead to another filing.
One filing is a yellow flag, but if you’ve got multiple MCA filings, that looks like your business is in distress. Then low-cost lenders will stay away until this is all cleaned up.
Stronger collection steps
The fourth issue that you have to think about is it gives the funder stronger tools if you default. A filing alone does not pull money from your bank account. As long as you’re making your daily or weekly payments, no one’s just going into your bank account to steal all your money. But what it does is it gives the lender stronger collection steps if you do stop paying.
For example, one of the things we recommend clients do is check their contract for what they pledged. If the contract lists receivables, inventory, equipment, deposit accounts, that filing perfects that claim. That matters in the event of a default occurring. The funder can and will notify customers or your credit card processor. They’ll try to claim listed equipment or inventory, or they’ll use the filing to push you into a payment plan, settlement, or judgment. A judgment is usually separate, more serious, and requires litigation, but the filing is often the first step to act as a pressure tactic.
Coverage and a personal guarantee can also be involved and change the risk. Often, most lenders will ask for some form of a personal guarantee to ensure that they collect their money. A blanket on all of the assets plus a guarantee gives the lender far more leverage than a narrow filing alone. It’s important if you’re struggling with merchant cash advance to pull the UCC-1 and compare it to your contract.
Filings after payoff and your potential business sale
Another issue that we often see is that the UCC filing can linger even after payoff and hurt your potential business sale. This surprises many owners. You pay off the advance and then you assume the lien is removed and ended. Often it stays. The UCC-1 remains visible until someone files a UCC-3 termination. Many funders will delay unless pushed. Often they’re just lazy and they don’t have the time to deal with it.
Meanwhile, searches will still show the old filing. A new lender will assume you still owe the debt. Buyers, landlords, or vendors are going to question it. Equipment buyers will fear it because they’ll assume that your business is encumbered. A standard UCC-1 often lasts five years unless terminated or continued. So an MCA paid from two years ago can still lock you.
If you have a UCC filing, it’s important to speak to the original lender who filed it and confirm termination, and obviously check the record yourself.
MCA UCC filing removal
So the question really is how to actually get an MCA UCC filing removed. First things first, let’s start with facts.
Your business name and state records
Start with your search your business name in the Secretary of State UCC database.
- Save a record of each filing.
- Take note of the filing number, the date, the secured party, and what collateral they list.
- Then match each filing to a contract and balance you signed.
You have to know if the debt is active, settled, paid in full, or wrong in order to do something about it.
Payoff or settlement
If the balance is active, removal will come from payoff or settlement. You have to get the deal in writing before you pay it off, though. It should say the payoff amount, the clear date, and a promise to file UCC-3. You should also ask who’s going to file and how fast, and obviously keep proof of payment. Then keep checking the state records after the payment clears. Don’t assume it was filed; lenders are often lazy when it comes to this.
Termination after payoff
If the debt is paid, request termination immediately. You should send a short request to the secured party with your business name, UCC-1 number, and proof of payoff. Keep it polite and firm. This is just a company fulfilling a job. Ask for a filed UCC-3 within a clear time frame.
Usually the secured party will authorize termination by filing a UCC-3. It often takes about 20 days after a proper demand to act or send you the form to file. Some states will let the debtor file in certain cases, but rules are very strict. Every state is different.
Partial release or subordination
If you need a partial relief, you can ask for a partial release or subordination, but not full termination. This will occur when you seek factoring or lender funds for specific invoices or equipment while the MCA is still pending. The MCA firm will still stay on record, but agrees in writing that the new lender has first claim. You should obviously get the exact collateral language. Vague promises are not going to help the next lender feel more comfortable.
Dispute in writing
In certain situations, a filing could look wrong and you should dispute it carefully. Common issues we’ve seen are wrong business name, a filing left open after payment, the wrong collateral or amount, or a filer you never borrowed from. It’s important to gather the contract, payoff letter, bank proof, and other records you may have. You should always dispute in writing to the secured party first. If that fails, then follow the state challenge process.
Some states let you add a debtor information statement. While this will not erase the filing, it does place your dispute on the public record.
Most importantly, don’t ever pay a random firm which promises instant UCC removal for a fee. You can’t just erase a valid active lien with random paper. Only a payoff, a proper release, a proper termination, a court order, or expiration will change the status of the UCC lien filed against you.
A written termination promise
So what is the bottom line for a business owner? An MCA UCC filing hurts because it is public. It warns off prestigious lenders and forces you to work with cheap, low-quality lenders who are going to claim your future cash, push you into costly debt, and eventually result in the default of your business.
Removal is paperwork, but it’s sticky and time-consuming. Find each filing, tie it to a balance, settle or pay it with a written termination promise, and then push for the UCC-3.
If you have issues with an active UCC or if your lenders are giving you difficulty, we encourage you to reach out to Delancey Street. We can give you a risk-free consultation and go over everything with you.
