Owners sometimes discover their merchant cash advance funder filed a UCC-1 on their company only when they apply for funding and a lender notices it. A UCC-1 financing statement is usually a single page, but it can scare off a potential funder. Here is what it means when an MCA funder files one on your business.
The first thing it means is that the funder is protecting its claim to your receivables. The MCA funders say that a merchant cash advance is not a loan because they bought a piece of your future receivables, but that does not put it outside the Uniform Commercial Code, because Article 9 covers receivables whether they are sold or pledged as collateral. So the funder may end up in the UCC for the same reason that a traditional lender would: it must protect its security interest, and the way it does that is by filing a UCC financing statement.
Second, the filing is tied to your company’s exact legal name. On the UCC-1, the name of the debtor has to match the charter or formation documents of the company exactly. That means capitalization, spaces, periods and commas cannot vary, and you cannot use a DBA or trade name instead of the actual name of the company. The reason is that the funder has to ensure that a third party looking at your files in the UCC registry can tell that the receivables belong to that same entity. A mismatch between your charter and your name as listed in the UCC-1 could confuse a party who comes to the search. An inaccurate name can make it hard to find or missed entirely.
Third, the filing itself tells the world very little. The UCC filing system is a “notice” system — if the name is correct, anyone who needs further information knows who to ask, and the form doesn’t need to describe the transaction or the collateral. The law even lets a funder describe the collateral simply as ”all assets,” which means that one filed UCC can cover all of your receivables, bank accounts, equipment and other business assets. You can’t tell from the form what has been pledged, so there is little you can learn from the UCC filing itself. Even once you see the filing on your company, you still won’t know if the company has taken a purchase or a loan or if it has put up any collateral. A UCC-1 does not tell you if the deal is still current or whether the advance has been paid off. And it doesn’t tell you anything about the amount of the financing.
Fourth, the name listed as the secured party may not be your funder at all. The UCC lets a secured party name a representative in that space. The representative doesn’t need to be the actual lender, and the filing doesn’t have to say that it is only a representative. Some lenders now file under DBAs or through corporate service companies, because they worry that competitors, including MCA funders, will use the UCC registry as a spying tool. If a funder put its actual name in the secured party field, that would be very revealing. This means it can be hard to tell from a UCC-1 who actually owns your receivables. You may see a filing on your company that does not list your funder. Some filers choose to use a representative to keep the details private, so you may not get information directly from the funder if you call the secured party.
The Filing Warns Other Lenders Off
Fifth, the filing warns other lenders off, but it doesn’t protect your bank account. Typically, after a UCC-1 is filed for a particular type of collateral, any future lender on the same collateral will take a junior position, which often cannot provide a lender with any economic protection. A funder’s claim may, therefore, scare off competition. In practical terms, that means that if a funder has filed on your receivables, other lenders may not come through with another advance or a loan. Checking accounts are different. A UCC-1 by itself can’t guarantee first priority there. In a deposit account, first priority is obtained by control, and the UCC usually removes all liens from funds as they leave the account. That is the gap. MCA funders are repaid automatically by pulling money from the business checking account. That means they can give money to a business after its collateral has already been pledged to another lender. And the cash the MCA funders take out of the account isn’t subject to any liens. For you, that means that you can take another advance even after you are “maxed out.” One funder’s filing doesn’t close the door to a second one. Instead, they’ll share your business and you’ll have to pay them both back. Your main operating account can end up chronically drained, and you may get stuck with multiple advances on your company. Meanwhile, a UCC-1 on your receivables won’t tell you that there is another funder in the picture, who has dipped into the balance in your bank account.
Sixth, the filing can follow your assets and get in the way of a sale or a refinance. A lien on specific collateral usually stays attached to that collateral even if it gets sold or transferred to a new owner, but there are numerous exceptions. So if you try to sell a piece of equipment outside the ordinary course of business, another party buying it could be hurt by the UCC-1. This means that your funder’s filing can follow the assets even if they no longer belong to you, and it can put a damper on any attempt to sell or refinance. A lender asked to refinance your debt can be left with little idea how big the original advance is or who holds it. A filing can also outlast the deal behind it, or exist without any deal at all. Sometimes lenders make a UCC-1 filing before a financing closes. If the financing falls through, the early filing is generally terminated, but not always. When that happens, it can be hard to distinguish between a valid financing and a filing that is still out there long after the advance has been paid back, or was never supposed to be there. This means that sometimes a UCC-1 on a company may no longer represent a current deal or may even be ”phantom” and not represent a real security interest at all. You could find a filing there with no deal to support it, and getting it released can take a great deal of time and money.
You Have a Right to Ask Questions
Seventh, you have a right to ask questions, though an MCA funder may try to dodge them. The Uniform Commercial Code allows a debtor to request an accounting from a secured party, and the obligated party should provide the information within 14 days. The catch is that the rule applies to a secured party ”other than a buyer of accounts,” and MCA funders prefer to think of themselves as buyers. That means that though you have a right to ask the funder, the funder may have no obligation to answer. Determining whether a merchant cash advance is a buy of receivables or a disguised loan is complex, and some MCA funders are probably lenders while others are not. A MCA funder that makes recourse financing might be disqualified from claiming to be a buyer and could therefore be in the UCC not as a receivables buyer but as a lender. It may be hard to know whether an MCA counts as a sale, but if it doesn’t, a funder is required to give you an accounting, and you do have a right to ask. You don’t have to believe the answer you are given, but you should ask. Even so, you may not get much information from the funder, or if you do, it may only come after a lot of arguing.
If an MCA funder’s filing is part of a bigger problem, like stacked advances pulling cash out of your account, it helps to know what it means, and where it came from, and how it affects your business. Delancey Street’s senior advisors work with MCA funders and other business creditors to negotiate paying less than the total amount owed; Delancey Street doesn’t extend business owners another loan. We are not a law firm; when litigation or bankruptcy is the right call, we refer owners to a vetted independent attorney. A first consultation is free and confidential, and if a cheaper option exists, we will tell you on the first call.
