Everyday Merchant Cash Advance (MCA) Companies purchase the future receivables of small business owners yielding harsh payback terms and payments. And each day, small businesses default on their MCAs. In fact, some outlets like Rutter suggest that MCA defaults are 600% higher than defaults on SBA loans. MCA defaults result in civil litigation, harassment, and most prevalent, UCC actions. The Uniform Commercial Code (UCC) is a group of laws created that relate to commercial transactions which are accepted by all states in the United States. UCC filings are used by lenders and Merchant Cash Advance companies to announce their rights to collateral or liens on a loan or tangible property.
To the layperson, UCC actions are how most MCA companies go after uncollected funds leaving small business owners with little choice but to submit to the MCA and collections companies demands. This article highlights the importance of understanding that MCA companies will resort to the draconian methods of UCC to force small business owners into a submission hold so they can collect the funds owed to them.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
The UCC Lien
While MCA companies, their attorneys, as well as their collections companies have tools they use to address MCA defaults, perhaps the most effective tool is the use of UCC.
Use of the Uniform Commercial Code (UCC) is one of the most prevalent and successful ways an MCA company can recoup their funds. We have written about this extensively and shared those articles are on our website. A UCC filing or lien are used by lenders and MCA companies to announce their rights to collateral, liens, or a secured interest. In the context of a Merchant Cash Advance, MCA companies will secure your receivables as a form of collateral using the Universal Commercial Code.
A UCC is nothing more than a legal form filed with the state Secretary of State (SOS) that announces that the lender or MCA provider has a secured lien on the business. Such actions allow the lender or MCA provider to seize and foreclose on the collateral or funds if the small business owner fails to pay what is due.
You have had a hard time paying back your MCA, but do the MCA companies care?
The simple answer is no. They don’t.
When you sell your future receivables to an MCA company, they expect to be paid for those receivables as per the MCA agreement. MCA companies and their investors are used to being paid back in a few weeks to a few months, with massive margins of profit. In some cases, MCA investors can make 60%+ return on their investment if someone “renews” their MCA. Overall, they believe you have stolen from them, and the MCA company will go by any and every mean possible to recover their funds.
Being Sued – Answering the lawsuit makes you 10 times less likely you will receive a judgement.
Some MCA companies choose to litigate against clients who default with the goal of either pressuring the client to get into a payment plan or achieve a fast judgement. Overall, when a lawsuit is filed by an MCA company against a small business owner for defaulting on a MCA, it’s most important to answer that lawsuit. This helps protect the client against the MCA company and allows for usually better outcomes. Furthermore, when a client answers a lawsuit through an accredited attorney, the client is nearly 10 times less likely to receive a judgement against them.
“A submission hold” before you know it.
Why is the UCC so powerful for MCA debt collection? For MCA companies, because implementing UCC works on a lot of those who owe money to MCA companies.
Once a small business owner defaults on a Merchant Cash Advance (or even has a hard time paying back the MCA) the MCA company, its collections teams, or their attorneys will file the UCC with the secretary of state in the small business’s state where the business is organized. Once the MCA company files the UCC paperwork, they can inform the small business owners bank (business and personal if personally guaranteed), their credit card or merchant processor(s), their vendors, and customers that the MCA company has a right to any funds that are owed to the small business. In many cases, the vendors will then transfer any funds held to the MCA company and will continue to do so until the lien is paid off. Realistically, once the UCC freeze holds bank funds, etc., with a judgement the MCA company can begin domestication or collection of the funds as needed.
The big point we are making is that once the MCA company or its collections people get to the funds it puts the small business owner in a corner that can be hard to get out of. Once the MCA company controls the client through UCC, the client has little they can do unless a skilled attorney can stop the process. However, this is not the norm, and the big idea is that small business owners need to get ahead of the UCC liens which will cause havoc.
Submission to Settlement “Deals “
Regardless, when an MCA lawsuit is filed or there is commencement of UCC actions, the goal is for the client to pay.
When a client defaults, most of the time the client does not even know that the MCA company has filed a UCC lien with the secretary of state in the state that their business is registered. Before they know it, the collections teams get to the small businesses funds and their bank accounts and processors are frozen, and vendors or customers are instructed not to pay the small business but instead the MCA company because they have the right to their money because of their agreement.
We have seen countless small business owners get to this point and have no leverage, ultimately being forced into an unrealistic payment plan or being forced out of business.
Regardless, the filing of the UCC and the employment of the lien can strangle most small businesses.
Not all industries are equal in the UCC game.
Not all industries are the same. That is, some industries are more exposed to UCC than others. Some industries which are exposed include trucking, anyone who is paid by insurance companies, state agencies, construction as an agent of one or two companies, and child care agencies.
For instance, when UCC liens are filed, the creditor will send Section 406 letters to the small business owners bank, credit card and merchant processing company, and any customer or vendor that the creditor knows that the small business owners use. Some small business owners rely on factoring companies, state agencies, federal agencies, or a couple of vendors/customers to pay them regularly. When there are few easy to find factoring companies, state agencies, federal agencies, or a couple of vendors/customers once 406 letters go out it is easy to strangle the small business owner into submission and not complying with whatever terms are provided will clearly put the small business owner out of business.
Some industries are less exposed to UCC. For example, restaurants and small contracting companies who do not have customers who are known to the MCA company are less exposed. If a company is less exposed, then it is much harder for the MCA company to find the revenue sources of the small business.
So what? If you are in an industry which has high exposure, then you must do what you can to protect yourself from UCC or expect the UCC filings. You can communicate with clients, etc. but from our experiences, once the MCA company or its agents send 406 letters, most vendors, customers, banks, etc. comply with the MCA company.
What if I close my business?
If you close your business, you may be able to hide from UCC. However, because most MCAs require a personal guarantee for financing, the MCA company can still go after your personal assets.
So – closing your business is not really an options for getting out of the way of the UCC machine.
What to do….
If you are a small business owner and you are staring down a UCC lien or multiple liens, do not wait to see what happens.
Anyone who defaults or even has trouble paying their MCAs should contact our team. Our team and attorneys will work with you to protect your business and personal assets from being subjected to the stranglehold effects of UCC before its too late.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Master’s and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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