By the time you understand what you’ve signed when you take an MCA, the lender already has a UCC-1 on every piece of equipment you own. It’s likely you took an MCA, to cover a payroll gap, after a major client went 90 days on you without paying. This is the usual story we hear. You then take the MCA, and spend the next 6 months really learning the underbelly of this industry. You eventually realize, it’s not a 40% loan, just because it says 1.40…it’s likely much more higher. You also then discover there’s a UCC lien on all your equipment and income. You then miss 1 payment, and out of thin air, the entire MCA ecosystem collapses on you. Most business owners don’t realize all of this until the entire ecosystem is already choking them.
What an MCA UCC Lien Filing Means for Your Business
This article is to help you understand what happens when an MCA lender files a UCC lien against you. Typically this UCC-1 financing statement gets filed with your Secretary of State, typically immediately after you get funding. In MCA lending, it’s almost always a blanket lien, which means the MCA lender is placing clames on your receivables, equipment, inventory, everything possible tied to your company, especially your future income. It’s not collateral, in the sense of a traditional bank loan which gives you money against your building. This is more of a net - for future things your business gets. The reason this matters is because this UCC lien will show up on your business credit reports. Your D&B, Experience, Equifax, etc, all of them. Other lenders will see this filing, and will pass on lending you money because of it. You might see a term sheet from a real bank, pulled, only a few weeks, after you take the MCA, because the underwriter at the bank will see the filings and see an MCA lender has a blanket lien against your assets. According to research done, SBA data shows that existing liens are responsible for 45% of loan denials. Another place where the UCC lien will interfere is if you try to get factoring, the company will tell you someone else already has a legal claim on your receivables. If you try and sell your business, the buyer’s attorney will find the lien, and either walk away, or haircut the purchase price by whatever the cost is to get the UCC lien cleared.
Customer Notifications and Frozen Payment Processors
The part that really hurts is when due to the UCC lien, customer notifications are received, where the funder is sending written notices directing the customers to send payments to the funder instead of you. It’s not uncommon for your Stripe account to be frozen after the funder sends an email to Stripe merchant services, with a copy of the UCC filing. Your customers now all know your business, your issues, and the status of your receivables. The customers know your business is in distress. Some will receive threatening lenders from MCA lenders mentioning they’ll sue the client if the client doesn’t hand over the funds.
Why the Lien Stays Even After You Pay Off the MCA
In addition, even after you pay off the advance, the lien doesn’t automatically disappear. It sits on your credit report for 30-90 days, sometimes longer if the funder’s back office moves slow, or forgets - which they often do. It’s not uncommon for someone to have to call the lender’s UCC termination department 5-10 times to get the UCC lien lifted.
When is the lien actually used?
The lien, by itself, is just paperwork. What changes everything is the restraining notice that is sent. If your funder has a COJ, and many MCA contracts do have one, then they can walk into court and get a judgement within 24 to 48 hours, without serving you, without any hearing. A few days later, the restraining notice hits your bank account your accounts are frozen. No levy, or garnishment, just straight frozen. Your payroll will start bouncing, your rent check will bounce, your vendor payments will bounce, virtually any payment you need to make will bounce now. Suddenly, you’re the person who can’t make good on his obligations. Between the UCC lien, the COJ, the customer notices, the payment processor being interrupted, you can lose 100% of your cash flow, before you even know there’s a case. The thing you absolutely do not do, is just close your operating account immediately. That’s the advice you see on forums, and it’s amateur hour. Closing your bank account can be perceived as a potential default. It gives the funder ammunition to say you violated the MCA agreement you signed.
Confession of Judgement
The COJ is a document you sign at origination, usually without understanding what it is. It says, in essence, that you confess in advance that you owe the money, and you authorize the creditor to walk into any court, and get a judgement against you without notice, without a trial, and without any opportunity to defend. The funder fills in the amount, files it with a clerk, and walks out with a judgement which can be enforced. No lawsuit is needed, no hearing is done.