Can MCA funders contact my customers? (UCC 9-406 notices)

UCC liens are one of the most valuable and destructive tools lenders and merchant cash advance companies have. MCA’s lean heavily on their UCC liens when collecting from distressed merchants. For you, the business owner, it’s one of the most frustrating parts of your experience with a funder. Here, I’ll cover the way the documents work, what the creditor is aiming at with this collection tool, what they will likely do, and what, if anything, to do when you’re up against it.

The Uniform Commercial Code

The Uniform Commercial Code is the legislation that governs business-to-business transactions in the US. It is uniformly adopted in every U.S. state. UCC filings publicly declare a creditor’s claim on a debtor’s property. The UCC lets lenders and MCA firms file documents declaring that they have claims on collateral tied to a loan or property.

UCC filings or liens declare to the world that a creditor has a right to some of your property if you don’t pay them. It’s a “security interest,” an insurance policy the creditor gets. If you don’t pay the creditor, it takes your collateral. In the case of an MCA, this collateral is the business’s receivables, the money it collects from customers.

In plain terms, a UCC filing is just a legal form a funder sends to the Secretary of State’s office. There, they publicly declare that they have a claim on the collateral for a loan you took from them. It lets the funder take the collateral pledged with the lien and sell it to pay themselves.

UCC liens aren’t themselves a bad thing. They’re fairly standard and common. Banks and lenders file them all the time in financing deals. Every lender is concerned about getting paid. So to them, taking a lien is a normal step.

So, the problems don’t start until you stop paying. When that happens, UCC filings give the creditor a huge arsenal of powerful weapons. Some of these can hit hard. But all of them work to hurt the business if it doesn’t pay back the money it borrowed.

In the funder’s mind, your receivables belong to them. After all, they bought those payments from you. If you stop paying, you’re just holding on to money that is supposed to go to them. They see your refusal to pay them as theft and believe you owe them the money. Most MCAs aren’t funded by banks. Instead, they’re funded by individual investors. So when one of these people thinks you’ve stolen their money, they tend to get angry. Often, their anger makes them pursue claims against you. So, many funders do not hesitate to throw everything they have at the debtors they believe have stolen their money.

And UCC liens are totally legal.

They’re a basic tool lenders have, and you probably agreed to it when you signed. But what’s more, most contracts declare what these remedies are. Funders often are explicit about how they will take your property if you don’t pay them back. So, the rules are in your contract.

What Actually Happens When You Default

So, the big question is what the creditor does with that arsenal. What actually happens when you default and the funder decides to take action?

When you default and stop paying, the funder’s goal becomes stopping you from having access to your assets and receivables. The funder decides you are no longer trustworthy. Its idea is that if you have access to the business’ cash, you might drain it, leaving little or none to pay your creditors.

The point of cutting off your access, by freezing your bank accounts, is to do one of several things.

• Funders love to use frozen money to push merchants to take a payment plan. And the deal they offer often is a bad one for the merchant.
• Another goal is getting a judgment and domesticating it.
• Another goal of freezing your money is to get you to pay them. If you have a chunk of frozen money, it can be tempting to just make them take it.
• Finally, the funder may just want to put you out of business.

To stop you from getting paid, a funder will do whatever it can. It wants to choke you until you give in. And to do that, it tries to get to the people who pay you.

406 Letters

If you don’t pay, the funders will send 406 letters to the people who pay you. These letters scare your customers and tell them that the funder has a right to your receivables, so they shouldn’t pay you. Funders and their lawyers or collectors send these letters. They claim that the customer has to hold on to your money and pay it to them instead. They contain a formal declaration that you owe the creditor money, what you owe, and that you defaulted.

There are some businesses that get nailed by 406 letters more than others.

A restaurant is less exposed. But if you are a medical group that gets paid by health insurance companies, a 406 letter would hurt. That’s because most payers take a 406 letter seriously and just stop paying. They do it to avoid getting sued by the funder.

Funders will also send letters to both your personal and your business bank accounts. They will ask the banks to restrain the money in any account you have. The bank doesn’t care that payroll is due or that you have vendors to pay. The funder sees that money as theirs. For this reason, the funder will pull out all the stops and do everything it can to get the banks to hold your money.

And yes, funders, and their lawyers and collectors are allowed to freeze your bank accounts. A UCC lien lets a funder and its agents, like debt collectors, freeze money in any bank account you have.

If you take credit cards, the funder can send a restraint letter to your card processor. The effect is much the same as with your bank. They can tell the card processor to hold onto the money your customers pay you by credit card. But here, they also ask for future money. Besides the banks, card processors and customers, funders have some other targets for their 406 letters.

• Payroll administrators
• 401K accounts
• Receiverships
• Retirement accounts
• Trust accounts

Finding the people who pay the business is not hard. The funder often knows, based on your bank statements, tax returns, and receivables lists that you probably gave at closing. Many MCAs ask you to list your trade references. And these lists are often packed with leads for the funders. To be clear, I am not telling you to hold back information from the funder when you apply for funding. That would be foolish. But know that the funder looks at the contracts, bank statements, receivables list, and tax returns you gave them to get funding. And those documents are a map that the funder can follow to those who will pay them.

Bluntly put, most funders aren’t concerned about what happens to you or your business. They’re concerned about getting their money back.

It’s easy to check if a lien exists. Most states have a UCC search tool on their Secretary of State website. By looking there, you can see that the funder filed it.

And if a funder sues you, the lawsuit doesn’t replace the lien. The two are totally separate. Both the lawsuit and the lien are weapons the funder gets to beat on you with.