A customer calls to say they got a letter from your merchant cash advance funder, telling them to stop paying you and pay the funder instead. Sounds crazy right? It’s frustrating to figure out what to do. And you are left wondering how this could have happened. The answer sits in the Uniform Commercial Code, which has been enacted in some form in New York and every other state, and if you don’t know how it works, unfortunately as a business owner you can be put in a terrible position. At Delancey Street, we negotiate with MCA funders on behalf of struggling owners, and these are the six rules we want every borrower to understand.
A Loan or a Purchase of Future Revenues
The first rule is that an MCA is, on paper, not a loan. Start with a typical bank loan. The bank gives you some cash, you promise to pay it back over time with interest, and as a condition of the loan you agree that the bank can take the accounts receivable if you don’t pay. That right is a lien, also called a security interest. The MCA agreement doesn’t work the same way. MCA financing is like the MCA buying a fixed amount of your future accounts receivable, which is just your revenue in this context. The MCA can buy $200,000 of future receivables from you in exchange for a lump sum of $150,000, and you must send them the money from your revenue, often daily, until they get the full $200,000 back. So on paper, you are not really borrowing money from anyone. You are selling your future revenue to them. That framing doesn’t make it cheap. The annual percentage rate (APR) of MCA financing can be unbelievably high. Sometimes it can be more than 100%.
The second rule is that the label is still being fought over. The line between a cash advance and a loan can blur. There’s a controversy about whether MCA financing is a loan or a purchase of future revenues. That fight plays out in the courts. The distinction matters because usury law, which regulates how much interest a business can be charged for borrowing money, may apply if the funding is really a loan, but might not apply to a true purchase of future accounts.
Notice of Assignment
The third rule is that, when you fall behind, your funder will often go to your customers. MCA clients generally can’t get a loan from a bank or other traditional financial institution, and they often struggle to pay what they owe to the MCA. If you don’t pay back the daily amounts owed to the MCA, they will often send out a notice to your customers telling them that if they owe you money, then they owe it to the MCA instead. When that happens, the business will lose the money they were expecting to collect, putting the business owner in a bind.
The fourth rule is that a proper letter binds your customer. If a customer receives a letter from a merchant cash advance company, demanding payment for a debt that the customer owes to the merchant, it should not be ignored. If properly authenticated under the Uniform Commercial Code, the customer is required to make the payment to the MCA, not the merchant. Paying the merchant after receiving the authenticated notice will not discharge the customer’s debt to the MCA, exposing the customer to double liability. So should you tell your customers to ignore the letter and keep paying you? Not a good idea. If the notice is properly authenticated, you could be setting up the people you depend on to pay twice.
The fifth rule is that the bar for authentication is low. As long as the assignment or notice of assignment is sent on the MCA’s letterhead, the notice should be fine. They are not required to have your signature. Under section 9-406 of the UCC, a form that bears the MCA’s name will normally do as well. So you shouldn’t presume the notice is invalid just because you didn’t sign it.
The sixth rule is that your customer can demand proof. Under the Uniform Commercial Code, a recipient of a notice of assignment is entitled to timely reasonable proof of that assignment from the assignee. Here, the assignee is your funder, and your customer can ask it for that proof. If they can’t, then your customer can keep paying you! That holds even if the customer first received a valid notice of the MCA’s claim.
Negotiate with MCA Funders
Owners and managers shouldn’t panic, but if you are facing this situation now you need to act quickly. We hate to see a business go under when they’re just hurting financially. At Delancey Street, our senior advisors negotiate with MCA funders, including on stacked advances, for less than the full balance owed. We aren’t a law firm, and we don’t lend money, either. If litigation or bankruptcy is in order, we will refer the owner to a vetted independent attorney. The first consultation is free and confidential. If your funder is contacting your customers, get off the fence and have our senior advisors get in touch.
