The Uniform Commercial Code (UCC) is a group of laws that relate to commercial transactions that 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. This article aims to build a better understanding of what UCC liens are in the context of MCA companies.
By Thomas Tramaglini, Chief Operations Officer
Many small businesses do not qualify for small business loans or need money fast so they turn to Merchant Cash Advances. Merchant Cash Advances (MCAs) are a way small businesses can secure funds for their business. However, MCAs are not loans. MCAs simply are when a small business sells its future receivables to an MCA company. The MCA company in turn advances the agreed purchase price, from which the receivables are then delivered at an agreed to value of the future receivables.
Because MCAs are not loans, the industry is not generally regulated and MCA companies get away with high payback amounts, short terms, crazy fees, and
sometimes utilizing unreasonable tactics for recovering funds.
UCC Clauses
Just about every Merchant Cash Advance includes a clause that includes what is called a "Security Agreement."
Here is an example of a "Security Agreement" from an actual MCA agreement (names changed to protect the innocent.
To secure Merchant’s obligations under this Agreement to make available or deliver Purchased Receipts to [MCA COMPANY NAME] and [MCA COMPANY NAME]'s right to realize the Purchased Receipts Amount, as and to the extent required by the terms of this Agreement, and performance of and compliance by Merchant with its other undertakings and agreements herein, Merchant hereby gives and grants to [MCA COMPANY NAME] a security interest in all Merchant’s now existing and hereafter arising or existing inventory, equipment, fixtures, accounts, general intangibles, investment property, deposit accounts, cash, documents, chattel paper, instruments, letter-of-credit rights and all proceeds thereof (together, the “Collateral”). This pledge will secure all of [MCA COMPANY NAME] Funding’s rights under this Agreement and any other agreements now existing or later entered into between Merchant and [MCA COMPANY NAME]. Merchant will obtain from [MCA COMPANY NAME] written consent prior to granting a security interest of any kind in the Collateral to a third party and any such grant of a security interest without [MCA COMPANY NAME]'s written consent shall be null and void. Merchant agrees to execute any documents or take any action in connection with this security interest as [MCA COMPANY NAME] deems necessary to perfect or maintain [MCA COMPANY NAME]'s first priority security interest in the collateral, including the execution of any account control agreements. Merchant hereby authorizes MCA COMPANY NAME] to file any financing statements deemed necessary or desirable by [MCA COMPANY NAME] to perfect or maintain its security interest without prior notice to Merchant. The UCC filing may state that such sale is intended to be a sale and not an assignment for security and may state that the Merchant is prohibited from obtaining any financing that impairs the value of the future Receipts or [MCA COMPANY NAME]'s right to collect same.
Upon any Event of Default, [MCA COMPANY NAME] may pursue any remedy available at law (including those available under the provisions of the Uniform Commercial Code (“UCC”)), or in equity, to collect, enforce or satisfy any obligations then owing to [MCA COMPANY NAME] against the Collateral without notice or demand of any kind by making an immediate withdrawal or freezing the Collateral. [MCA COMPANY NAME] shall have the right to notify account debtors at any time. Pursuant to Article 9 of the UCC, as amended from time to time, [MCA COMPANY NAME] has control over and may direct the disposition of the Collateral. Upon the full performance by Merchant of Merchant’s obligations under this Agreement, the security interest in the Collateral shall automatically terminate without any further act of either party being required, and all rights to the Collateral shall revert to Merchant. Upon any such termination, [MCA COMPANY NAME] will execute, acknowledge (where applicable) and deliver such satisfactions, releases and termination statements, as Merchant shall reasonably request. For avoidance of doubt, this security pledge shall not (i) permit [MCA COMPANY NAME] to collect the Purchased Receipts Amount in the event that Merchant itself is not required to remit it, such as for the reasons set forth in in this agreement, or (ii) otherwise affect the contingent nature of this transaction.
In the event Merchant, any of its officers or directors or any Owner/Guarantor, during the term of this agreement or while Merchant remains liable to [MCA COMPANY NAME] for any obligations under this agreement, directly or indirectly, including acting by, through or in conjunction with any other person, causes to be formed a new entity or otherwise becomes associated with any new or existing entity, whether corporate, partnership, limited liability company or otherwise, which operates a business similar to or competitive with that of Merchant, such entity shall be deemed to have expressly assumed the obligations due [MCA COMPANY NAME] under this Agreement. With respect to any such entity, [MCA COMPANY NAME] shall be deemed to have been granted an irrevocable power of attorney with authority to file, naming such newly formed or existing entity as debtor, an initial UCC financing Statement and to have it filed with any and all appropriate UCC filing offices. [MCA COMPANY NAME] shall be held harmless by Merchant and each Owner/Guarantor and be relieved of any liability as a result of any such authentication and filing of any such Financing Statement or the resulting perfection of its ownership rights or security interests in such entity’s assets. [MCA COMPANY NAME] shall have the right to notify such entity’s payors or account debtor (as defined by the UCC) of [MCA COMPANY NAME]’s rights, including without limitation, [MCA COMPANY NAME]’s right to collect all accounts, and to notify any Payment Card Processor or creditor of such entity that [MCA COMPANY NAME] has such rights in such entity’s assets. Merchant also agrees that, at the [MCA COMPANY NAME]’s discretion, [MCA COMPANY NAME] may choose to amend any existing financing statement to include any such newly formed entity as debtor.
You have a Merchant Cash Advance: What does UCC this mean for you?
If you miss payments or default, it means the MCA provider can do any of the following (and more), because you have agreed to their UCC requirements.
How can UCC liens affect your business?
UCC liens identify to others that you have a security interest lien
Prevents additional borrowing
Negative credit on your business credit
Assets that are pledged for recovery
MCA Company Actions:
Harass your suppliers
Harass your customers
Freezing your customer payments
Freezing your assets
Freezing your bank accounts
Holding funds collected by your credit card processor
Holding funds with a licensing agent
Many others...
What should you do if you are in danger of defaulting or in default on your Merchant Cash Advance?
Understand what a UCC lien is
Review the UCC section on your Merchant Cash Advance Agreement
Search for your UCC Lien on your state's secretary of state website
Get connected to advisors who are experienced so you are able to handle any UCC actions
Connect with an attorney who can help you in the venue of choice by the MCA company or creditor
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 Masters 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 of our work is connected to those who are legally certified to give such advise. 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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