Merchant Cash Advance (MCA) firms have long been known for aggressive tactics—but one of their most disruptive moves involves a little-known provision of the Uniform Commercial Code: UCC 9-406. While intended to protect legitimate lenders, this statute is increasingly being twisted to disrupt business operations and undermine existing credit arrangements.
Understanding UCC 9-406
UCC Article 9-406 allows a secured creditor with a claim on a business’s receivables to notify that company’s customers (known as account debtors) to redirect payment directly to the lender. It’s a common and lawful practice in asset-based lending, meant to ensure lenders can collect on the collateral securing their loan.
However, in recent years, some MCA companies have begun misapplying this rule to redirect funds—even when they lack the proper lien or authority to do so.
How MCA Companies Are Weaponizing 9-406
Instead of using redirection notices for legitimate purposes, some MCA providers blanket a business’s customers with payment instructions—effectively cutting off the company’s revenue. These notices are often:
- Overreaching: Aimed at all receivables, not just those related to the MCA agreement.
- Legally flimsy: Sent without proper legal standing or priority.
- Disruptive: Confusing customers into compliance, often out of fear of being caught in a legal mess.
This maneuver derails cash flow, paralyzes daily operations and throws secured lenders into chaos.
The Fallout for Lenders and Borrowers
For traditional lenders—such as banks, factors and ABLs—this tactic creates significant collateral risk and can force them into reactionary measures:
- Companies lose access to their own receivables, jeopardizing payroll and expenses.
- Lenders lose control of assets securing their loans, threatening defaults.
- Lending relationships deteriorate, sometimes pushing lenders to accelerate or exit.
- Litigation may follow—but by the time the dust settles, the financial harm is often done.
How to Guard Against Improper 9-406 Redirections
The best remedy is proactive defense. Here’s how lenders and business owners can protect themselves:
- Tighten contracts: Include clauses that forbid unauthorized redirection of receivables.
- Use Article 9 to your advantage: Consider restructuring receivables through secured transactions to flush out hostile claims.
- Educate account debtors: Help your customers understand how to identify legitimate notices versus questionable demands.
Final Thoughts
MCA providers have become increasingly sophisticated, and their misuse of UCC 9-406 represents a serious threat to both businesses and lenders. When used improperly, it can cut off vital cash flow and destabilize entire lending structures.
Business owners: Know the risks before entering an MCA agreement.
Lenders: Monitor borrower activity and enforce your security rights early.
If you’re dealing with an unauthorized 406 redirection, contact us—we can help you restore control and mitigate the damage.
