Owners with stacked merchant cash advances often ask us at Delancey Street who gets paid first when several funders have filed a UCC. The short answer: If you have opened up financing with multiple funders, the one that filed their UCC against you first is first in line to get paid. Put another way, if you have three advances, and each has a blanket UCC filing, the first advance will get paid first if the worst comes to pass, followed by the second advance, and so on.
To see why, start with what a blanket filing is. When a lender has a blanket UCC filing, they have a security interest in the entire company’s assets. This is called being “secured” and in fact turns an otherwise ordinary receivable into a secured one.
It helps to know how creditors think about this before they file. A credit manager weighing a blanket filing is taught to ask, before filing, what’s my goal? Do I want a priority security interest in the goods I sold so that I can take them back? Or do I want a security interest in everything the customer has? If the latter, then I should have a clearly identified collateral and get the customer to grant me a security interest in everything via a Security Agreement. Then I file. Blanket filings makes sense when you’re financing or providing service, and where the customer consumes your goods and doesn’t resell them.
First in Time, First in Right
When more than one creditor holds that kind of claim, they cannot all be first. The rule is first in time, first in right. According to the principle, the first creditor to file, say, a Blanket UCC form has priority over later filers. Each creditor’s position is the day and time its filing was recorded. The order in which creditors are paid off in a bankruptcy situation is in the order in which they file. If your business goes belly up, the one with the earliest filing date is paid first from all assets the business owns, and the next one is paid second, and so on down the list. That is why the standard advice to creditors is to have the filing recorded before they lend or ship, and that you always perform a UCC search before filing a UCC to see who’s filed ahead of you.
Priority is not only a bankruptcy question. Creditors work from a short playbook when a customer stops paying, and it is worth hearing it from their side: If a customer has defaulted and you have a blanket UCC on them, you can take the account to collections or file suit. If they file for Chapter 7, you file a secured proof of claim.
Some owners in distress think about selling the business to escape the debt. The UCC is a lien on the business, which means when you sell the business, the lien should be acknowledged and either settled or renegotiated before title changes.
How the Line Forms When a Business Fails
A simple example shows how the line forms when a business fails. The creditors are a bank and vendors, not funders, but the rule is the same. Chef Charles had spent his entire life working in restaurants. He decided to open a restaurant. He presented a business plan to the bank and requested $20,000 in start-up capital. The bank agreed and perfected a security interest. Charles needed to purchase food and materials. Next, vendors had to decide to either sell to him on open credit, credit card or cash in advance. Those selling on open credit had to choose between secured or unsecured. Four vendors took security and filed UCCs. The others sold him on open unsecured credit. The restaurant carried about $61,000 in assets at any given time. Three years later it failed and he filed Chapter 7.
The bankruptcy trustee collects assets, liquidates them and pays creditors from the proceeds, in order of priority. First, the bank. They’re a secured creditor, and they’re first in line. The bank lent first and took its security interest first. Then come the four vendors who filed UCCs, in the order in which they secured their interest. After the secured creditors are paid, there is $6,000 left for the 100 creditors owed $1,000 each. It is divided pro rata among Charles’s general unsecured creditors. Each of those 100 creditors would get $60 ($6,000 divided by 100), or 6 cents on the dollar.
Stacked Advances
Now put your own business in Charles’s place. The funder that recorded first stands where the bank stood. The second funder’s blanket filing runs second in the queue. So if you have 3 UCCs on your business and it all folds, the first UCC is the first to get their check. The second party UCC is the second to receive, and the third party UCC is third. Anyone who never filed lines up with the unsecured creditors and shares whatever is left.
For an owner juggling stacked advances, the takeaway is that the advancing party who filed first has a strong claim against your business. The advancing party who filed last is in the weakest position. Do a UCC search on your company now. Find out who’s on your business, and in what order they filed. If you know the filing is there, you can manage it.
Delancey Street is a business debt settlement company. We negotiate with funders and lenders for less than the full amount, and we don’t sell you another loan. The first consultation is free and confidential, and if we can’t win your case, or if a cheaper option exists, we’ll tell you so on the first call. Sometimes the better path is bankruptcy, and when it is, we’ll point you to a vetted independent attorney.
