If you’ve ever had Stripe payouts on hold, you likely know the feeling of surprise and panic. You don’t know why or who’s behind it, but something is wrong, and it needs to be fixed. If you are behind on a merchant cash advance, the question is simple. Can my MCA freeze my Stripe payouts if I’m in default? Yes, and they may not even need to go to court to do it. MCA funders know that owners will be agitated if they lose access to their funds for any reason. A payment hold is their highest form of leverage.
The UCC Lien
Let’s start by briefly explaining how Stripe works. When a merchant sells something with a credit card, the payment information is processed through Stripe, and then transferred to the merchant’s bank account. If the merchant owes money to an MCA company, that money could be redirected. The tool that does it is the UCC lien (UCC stands for Uniform Commercial Code), and you gave your funder the right to file one when you signed. A judgment allows a funder to freeze your bank account, but a UCC lien freezes your receivables before the money ever gets into your bank account. If you are a business that gets paid through Stripe, the payouts are the receivables. Most funders prefer the UCC lien because it is much faster and more effective than a judgment. An owner would hardly know they’re being targeted until the money stops showing up in their bank account.
Within a day or two of filing a UCC lien, the funder sends a copy to everyone they know pays you, and there are many. This includes companies like Stripe, Square, PayPal, Shopify, CashApp, and Venmo as well as your credit card processor and terminal, if you use them. It also includes your customers. Any customer they know of can get a letter telling them to stop paying you, and to start paying the funder instead. This is scary stuff.
How does the funder know who pays you? Probably because you gave them a customer list at underwriting and a list of trade references. The trade references may include your customers. They can also see who pays you on your bank statements. If you gave them access to your bank account, they can look through that too. I’m sure they know about Stripe as well.
Once the notice lands, the consequences are embarrassing. There’s nothing coming in, and how can you operate your business like that? Your customers see the notice as a sign of weakness and they don’t want to be dealing with you. If you’re having legal trouble, they don’t want to get involved in that. Some take their business somewhere else.
Many owners got where they are now because they went to a broker. Brokers don’t lend money, so they don’t care if you ever pay back the advances. They work on commission. Because they don’t care if you pay the money back, they love stacking a business - having one business have several advances from different funders all at the same time. The most popular lie is “The MCA is just a way to get you temporary funds, next month we’ll move you over to a traditional loan.” Unfortunately, the loan never comes. So, now several funders may each have a UCC lien on your receivables.
Switching from Stripe
So why not just move your sales off Stripe? When you default on your merchant cash advance, it triggers a lot of fees in your contract. For example, insufficient fund fees are about $35 each. Stop payment fees could be $500-$5,000. Fees for changing out your bank and your merchant accounts can be $100-$2,500. Your default fee could be $2,500-$5,000. Then you have third party interference fees of $2,500-$5,000. Switching from Stripe to a new payment processor to avoid the funder can cost you.
There is one more angle. With a true merchant cash advance, the funder has to wait to see if the receivables come in. If the receivables never show up, the money advanced was a bad investment and is gone for good. In a loan, it doesn’t have to worry whether those receivables come in or not. So if your Stripe account is open and simply not receiving funds, a true MCA funder should not be collecting. The agreements do include clauses against closing your merchant account on purpose to avoid paying, though. Some MCAs involve a 100% to 200% profit margin or more, which would be considered usurious under the laws of most states if the contract were considered a loan. A well-drafted contract can allow the funder to get away with it. Unfortunately, a lot of funders don’t have their contracts drafted properly.
Confession of Judgment
The lien is not the only weapon. A confession of judgment (COJ) waives your right to the usual legal defense if you default. In 2019, New York banned COJs against out-of-state business owners. Now funders file them in Texas, Illinois, Utah, and a handful of other states. Most funders still file regular lawsuits to obtain a judgment. That judgment can also be used to freeze receivables.
Most merchant cash advances require a personal guarantee, and the owner may not even know that. While a personal bankruptcy would discharge your personal obligation, it wouldn’t relieve you of the liability for the business. Conversely, a business bankruptcy would not alter your personal liability. At this point, you can either negotiate a settlement, defend the case in court, or file bankruptcy as a last resort.
Be careful who you call. Some settlement companies promise to cut your payments in half if you make one payment into escrow. People tend to get excited about the things they buy, especially when it promises to save them money. At that point, nobody wants to worry about the risk factors. Those get swept under the rug. That’s how money is made: First, make the sale and then deal with the consequences later. Meanwhile your accounts and receivables get frozen, and fees paid to a settlement company are not refunded.
So, can an MCA company freeze Stripe? Yes. The UCC lien your contract allows is the funder’s weapon of choice. It quickly and efficiently freezes the merchant’s accounts receivables before they ever make it into the merchant’s bank account. But that doesn’t mean you’re powerless. Don’t panic. Talking to a settlement company? Ask about the lawsuit and the UCC lien before you sign. If you have any questions, you should seek help as soon as possible before the receivables have been frozen.
