Owners who fall behind on a merchant cash advance often tell us the same story. Their funder sends a letter to all their customers telling them to redirect payments away from the company. Some owners think their customers have to obey that letter. They do, if the notice is legally effective - and once it is effective, it’s the customer’s problem if they pay the wrong party. Not all notices are legally effective though, and customers do have some options. So if you are asking whether your customers have to pay your MCA funder after a UCC 9-406 notice, the short answer is yes. Those customers do have to pay the MCA funder. Now the rest of the answer is a little more complicated.
A Formal Letter to Your Customers
A 9-406 notice is literally a formal letter to your customers explaining that they need to start paying the MCA instead of you. This often happens when a company sells or pledges its invoices as collateral for a loan or advance. The Uniform Commercial Code calls your customers “account debtors,” and Section 9-406 lets the funder contact the account debtors and demand that they turn over the money they owe you directly to the funder. This assignment letter will identify the business, explain that it has been pledged, and provide a total amount owed. It may or may not attach a copy of the assignment, and it often comes from a law firm or collection agency on behalf of the merchant cash advance company rather than from the funder itself.
But why would your customer side with a stranger? Because they are legally required to. And once a customer has received a valid notice, it can’t pay you anymore without the funder collecting from it. And if the customer does pay you after receiving a notice, the funder can make the customer pay again. Even though the customer already paid, it still has to pay. The customer is out, sorry. Whether the customer can get the money back from you is irrelevant. Paying you after the notice is just throwing money away. There’s only one way for the customer to avoid that wasteful outcome: pay the funder instead.
That is why the details of the notice matter. To be valid, it must be signed (a so-called “electronic signature” is fine for this purpose), it must reasonably identify what’s being assigned, and it must request payment of the full amount due. A customer can ignore the notice if it doesn’t ask for all the money, or if it asks them to pay only part of the money for an invoice. If the customer asks for proof that the debt was sold, and the funder doesn’t produce it, the customer can hold off on paying.
And here’s what happens next. A savvy customer will put a pause button on all payments to the business in their accounting system, so it doesn’t send a check to the wrong person. They’ll then verify whether the notice meets the legal requirements, request proof if none is attached, and independently check the state’s UCC database (most state government websites provide free or low-cost UCC searches) to confirm the funder has a lien against the business. Once confident the notice is legitimate, they’ll instruct all future payments to the funder until the funder officially informs them that the debt has been cleared.
Anti-assignment Clauses
Some owners hope their customer contracts will save them. Don’t assume the funder can’t ask the customer to pay them because your contract with the customer says “You can’t assign this.” The law basically steps over that clause (Section 9-406(d) generally overrides anti-assignment clauses, with very limited exceptions) and the customer still has to pay the funder. At the same time, the customer can still assert any of their normal commercial defenses - including the right to have their own bill set off - so the funder can’t ask for money the customer doesn’t owe. The funder steps into your shoes, so it is owed only what the customer owes you. If the customer had a credit on the invoice for a defective product, the customer wouldn’t have to pay the funder the full amount of the invoice.
Then there is the call many owners make in a panic. You call the customer and tell them your funder sent a bad notice. You get all dramatic, saying you’ll stop delivery if they don’t pay you. Whatever you say, that customer’s lawyer will tell them, they have to pay the funder if the notice was effective, even if you are in a fight with the funder about it, and if they choose to pay you, that’s their risk. Because if they pay you, and then the funder comes knocking, they’re paying the same amount twice. Any disagreement over who the owner owes or doesn’t owe is a fight between the owner and the funder, not the customer’s problem. If you believe the funder is wrong, your remedy is against the funder.
How long does it last? Redirects don’t end on their own. Customers won’t accept your word that it’s paid off, and honestly, they’re right not to. They need a formal termination notice from the funder, the only one that counts. Since the funder is often juggling multiple customers’ payments, it’s the funder’s job to tell everyone when the total is reached - not their job to figure it out.
Don’t Instruct Your Customers to Disregard the Notice
So what should you do? Don’t instruct your customers to disregard the notice. Check the notice to see if it’s signed, if it describes what you assigned, and if it asks for the whole payment, and keep your customers in the loop about what’s going on. (They’ll be withholding payments until they double-check the notice.) And where the notice’s effectiveness is unclear, or where you are disputing the funder, get legal counsel right away; a quick legal review is inexpensive compared with the downstream damage.
