When you sign the advance agreement to receive your merchant cash advance the funder asks you to grant them a lien on your business assets. They then file that lien publicly to let others know they have a claim on your assets in case you don’t repay the advance. What most owners don’t realize is how long that public notice outlives the debt. Here are six facts worth knowing.
Terminate the UCC-1
The first is that the filing does not end when the payments do. Paying the balance does not automatically remove the lien. The UCC-3 must be filed to terminate the UCC-1. Under Section 9-512 of the Uniform Commercial Code, that amendment form does more than end filings. UCC-3 should also be used for a continuation, an assignment, or a change in the names of the parties or collateral. Normally the funder files a termination once you’re paid in full, but they can forget to do it or perhaps the accountant doesn’t care about something that small. So you can see how the form stays on record long after the debt has been paid off. This leaves the business owner with a cloud over his title, which makes it difficult to obtain another MCA.
Second, the termination has to come from the right party. Only the right person can file a termination. Under Section 9-509(d), a termination statement is only effective if the proper party authorized it, and most of the time that is the funder, as the secured party of record. Often, a borrower will be advised that “only the secured party of record can terminate a financing statement” and then go and ask their MCA provider to file a termination. That is usually the right first step, but it is not the whole story, because in some situations the debtor can authorize the filing. Sometimes you’re the authorizing party. Sometimes you aren’t.
File the Termination
Third, you can make the funder act. As long as your obligation to the funders is fully discharged, and there’s no possibility of you borrowing more money in the future from them, you can demand that they send in a termination statement. The only caveat is that you have to send an authenticated letter of demand to the secured party of record at the name and address that the financing statement says is the secured party of record. Then they have 20 days to file a termination statement, or send one to you. If they don’t, you can file the termination statement. Send that demand by certified mail, with a copy of the original UCC-1 attached, so you can prove it was received. If you haven’t paid in full, don’t expect a termination.
Fourth, if the 20 days pass and nothing happens, you can file the termination yourself. At that point you have to file a UCC-3 “Termination” form to tell the government the lender’s UCC-1 filing no longer applies to your business because it has been paid off. To successfully file the form, you must correctly fill out the form’s required information, including its filing number, the type of amendment (in this case “Termination”), and the party authorizing it. If the party authorizing the termination is the debtor (your business), you also need to check the box for debtor authorization on the form. If you fill in the form incorrectly, for example with the wrong filing number or authorization party, the filing office can reject it. Read this form, and then read it again, before you file it. The UCC-3 amendment form can be filed either with the Secretary of State or with the county office where the UCC-1 was originally filed.
Fifth, a termination only clears the parties it names. If the financing statement lists multiple secured parties of record, either the termination must list them all, or each secured party must file its own termination. So if your UCC-1 lists more than one secured party, check that the termination covers every one of them. Partial changes have their own forms, too. The form to be used when you want to delete only one of a group of debtors is a party amendment that deletes that debtor. The form to be used when you want to delete only part of the collateral is a collateral amendment that deletes that collateral.
Get Written Confirmation
Sixth, a funder that ignores a proper request can pay for it. Pursuant to Section 9-625, if a secured party of record fails to terminate a financing statement and leaves the debtor without the ability to get alternative financing, it may be liable to the debtor for $500 in damages plus actual damages. Before you apply for new financing, do one more thing. Get written confirmation that you’re clear and they have no more interest in your business. A new lender looking at your file may contact the old funder anyway. You really need to verify that the filed termination was done by the right party.
So how long does an MCA funder’s UCC filing last? The honest answer is “that depends.” It depends on how long it takes for the advance to get paid back. It depends on whether the funder forgets to terminate it. It depends on how many named secured parties there are on the form. But if you don’t want it there, there are steps you can take to make sure it gets removed. If the funder doesn’t respond to your certified letter of demand within 20 days, you can just file the termination.
