Yes, a UCC lien can shut down payment processing. If you took a merchant cash advance and are late on repayment, your MCA company has the legal right to utilize its UCC lien to tap into funds being processed with your credit card processor. It is common for MCA companies to send letters to your current credit card processors after a small business defaults, restricting any funds you have or will have with them. Your bank accounts, customers, or anyone else paying you could be subjected to the same action. The UCC lien is one of the strongest weapons MCA companies have.
A UCC Filing, Often Called a UCC Lien
The Uniform Commercial Code (UCC) is a set of laws governing commerce that have been adopted by all states. A UCC filing, often called a UCC lien, is simply a document filed with the state Secretary of State. It declares that a lender or merchant cash advance (MCA) provider has a secured interest in the business. For merchant cash advance providers, the filing is used to take the business’s receivables as collateral. The document permits the lender or MCA provider to seize the collateral or funds if the business owner does not pay what is due.
Most lenders, banks and alternative lenders are going to file a UCC lien on any business that owes them money. There’s no real stigma associated with a UCC lien. It basically tells the world that some party has an interest in a business’ assets or receivables, that the business has borrowed money. It’s when a business begins to default that the UCC can become problematic. Once a business defaults, the UCC gives the creditors several courses of action, and those courses of action can be devastating to the business.
Most MCA Lenders View the Customer as a Thief
When a merchant starts having problems with cash flow and stops paying a Merchant Cash Advance, most MCA lenders view the customer as a thief. They perceive that they have purchased the future receivables of the business and therefore that the business owner has stolen from them. In most cases a cash advance is funded by individual investors, not banks. Those investors feel like they have been robbed, and the MCA company, seeking to protect its investors, will do everything they can to recoup their money. Understanding this is the key to knowing how far they will go.
As soon as you default on a Merchant Cash Advance (MCA), the MCA company (or their recovery firm) begins a process with one objective: to block the owner’s access to funds and receivables so it can collect the money it is owed. The intent in freezing the money is to:
- cause the owner to enter into a payment plan, many of which are not in the business’s best interest;
- to recover the money through a judgment and domestication;
- to get the owner to sign over money being held in exchange for future funds to be released;
- or squeeze the business until it goes out of business.
UCC-406 Letters
MCA companies and the debt collection firms who handle collections on their behalf send UCC-406 letters to the customers and companies that pay the business. The letter states that the business has defaulted on its repayment agreement, provides an amount the business owes, and warns the payer that it is legally required to freeze the money and forward it to the MCA company or collections firm. 406 letters are more effective at freezing the cash than they are at getting the payer to pay the MCA company or collections firm, but they work well either way. Some businesses are more vulnerable to these letters than others: a restaurant is less vulnerable to 406 letters than a business that’s paid by health insurance companies. Once payers get 406 letters they generally comply because they are afraid of getting sued.
They might also send letters to all of the owner’s banks, personal and business, to freeze money in any account. It doesn’t matter if the business needs that money to run payroll or pay vendors. MCA companies consider the money in the account as the receivables they are owed. Is that legal? Yes, it is, under the Uniform Commercial Code.
Like with banks, the MCA companies often issue UCC-406 letters to the business’ credit card processors to restrain any funds the business has with its existing processor or will have with it. Other places MCA companies have attempted to restrain funds include payroll administrators, 401K accounts, receiverships, retirement accounts and trust accounts.
Let’s be clear, the company is allowed to do this. You probably gave them permission to do it when you signed the MCA contract. Most merchant cash advance agreements spell out which UCC actions the company will take if the business does not pay. Often, business owners ask how the company is allowed to do this. The answer is simple: they gave permission.
It’s not hard for the MCA company to know who to send letters to. When applying for an MCA, you give them your bank statements, tax returns, sometimes a list of accounts receivable, and all those things contain a lot of information. You probably shouldn’t try to withhold information from the MCA, but don’t be surprised if they reach the payers they saw on your bank statements and in those documents. Many MCA contracts also include trade references, so they’ve got more information to work with after a default.
Sometimes when collection agents call they try to give the owner financial advice. They might suggest that the owner get a second mortgage on a primary residence or repurpose assets. Almost none of them knows what they are talking about, and they have no expertise, experience or license to give you that type of advice. Taking that advice can harm your personal or business finances beyond repair.
They only want their money. They’ll do whatever they can to get it. And if an MCA company has sued your business, that does not replace the UCC lien. UCC liens and UCC actions are completely independent of MCA lawsuits.
If you are delinquent on a merchant cash advance, don’t be surprised if the lender uses the UCC lien to collect. The MCA company will try to restrict whatever money it can track down, with your credit card processor, in your bank accounts, with your customers. You probably agreed to this when you signed the contract. It does not go away if you are sued. Don’t make big decisions about your property or assets based on what the collector recommends.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
