What can a merchant cash advance company do with a UCC lien if I stop paying?

Of all the techniques MCA companies use to force small business owners to repay, the UCC lien may be their most powerful. In this article we cover the UCC rules, what MCA companies want, what they can do, and how you can respond.

Uniform Commercial Code

UCC stands for Uniform Commercial Code. It’s a set of laws regulating commercial transactions. All 50 states have adopted UCC law in one form or another. UCC filings is where lenders and merchant cash advance companies declare what liens they hold, if any, on particular collateral.

A UCC filing is a public announcement that the filer has a secured interest in a piece of collateral. In the case of an MCA, the collateral that the merchant cash advance company takes is the business’s future receivables.

The filing serves as a public notice to other lenders and creditors that the MCA has a secured interest in the future payments your business expects to receive.

The filing itself is literally just a simple form that’s filed with the Secretary of State declaring that there’s a lien attached. If the business doesn’t pay, it gives them the right to seize the collateral or funds.

UCC liens themselves aren’t bad, not even for MCA debtors. Because they’re not really just for MCA debtors. Commercial banks and other lenders routinely file them against business borrowers for the same reasons MCA companies do: As a placeholder and notification, to warn other potential creditors that the filer has a claim on the borrower’s receivables.

Very Harsh Collection Tactics

This is where it gets dangerous. If you stop paying on your MCA, the UCC says the creditor can use a whole range of very harsh collection tactics against you. We go over what some of those are.

It’s hard to overstate this point. MCA companies feel that they bought your future receivables, so when you fail to make payments on the advance, you’ve stolen their money. As far as they’re concerned, they already own the receivables. As they see it, you can’t touch them. Because most advances are funded by individual investors, these firms feel the investor has been robbed. Every payment you skip on your MCA is a robbery in progress. The company will treat you like a thief. MCA agents are just vicious. Expect them to go to any length.

And it’s absolutely legal. Completely and 100 percent legal.

And you probably agreed to it. Most MCA agreements will have a section where they specify the UCC actions the MCA will take if you default.

Okay, so what does a UCC lien mean for your MCA payments? It means a lot of horrible things.

As soon as you default on the MCA, the company or a collection agency they hire will move to freeze your receivables and your assets. Their goal is to keep you from touching them.

It’s not an end in itself. It’s a tactic to accomplish several other things.

• The MCA company wants to trick you into getting into a repayment plan you’ll never get out of.
• Try to collect via a judgment and domestication.
• The MCA company wants you to sign over the money it’s holding to open the door to future receivables.

MCA companies will use any means at all to choke you to death.

406 Letters

To freeze your receivables, the MCA company or a collections agency it works with will issue what are known as 406 letters to your payers. Each letter tells them that you defaulted on your contract with the MCA company and that you owe it money. They will include all the regular legalese you’d expect, and instruct your payers that all payments owed must legally be withheld and paid to the creditor instead of to you.

Some small businesses are more vulnerable to these letters than others.

For example, a restaurant is less exposed than a company paid by health insurance companies. Most of the time, whoever gets the 406 letter abides by it, not wanting to get sued.

MCA companies also issue 406 letters to your personal and business banks. They will construe the dollars in your bank balances as receivables and owed to the creditor. They don’t care who you are - all they want to do is get their money. It’s all just resources to them, and they aren’t interested in your payroll or vendors or cash-flow issues.

And yes, the Uniform Commercial Code authorizes MCA companies and collections agencies to freeze money using a UCC lien.

Just like banks, credit card processors get 406 letters to freeze the funds it holds for you now, and it expects to hold for you in the future.

Likewise, MCA companies and other creditors can send 406 letters to other parties who might be holding money that technically belongs to you:

• Payroll administrators.
• 401(k) accounts.
• Receiverships.
• Retirement Accounts.
• Trust Accounts.
• Even worse: once the creditor gets a UCC lien, some of them will try to start telling you how to run your finances. Always be wary when they offer help.

One tool they’ll use to find targets is a list of the people who pay you. The bank statements, tax returns and receivables list you hand the MCA company when you apply for the advance will give it a good picture of who owes you money. Likewise, many contracts require you to give trade references. Once the company or the creditor gets all the information, it can start sending 406 letters. We’re not advising you to play hide-the-ball with MCA companies. We’re just pointing out how easy it is for them to find their targets.

Straight to the point: most MCA companies don’t care if your business goes under. They just want to be repaid one way or another.

To check for a UCC lien against you, go to your state’s Secretary of State website and use its UCC search tool. Anyone can search.

Being sued does not stop the UCC process either. Not at all. Because the UCC process is separate from a MCA lawsuit, and neither one stops the other. They are completely independent.