Can an MCA Funder Repossess Inventory? 6 Reviews When Someone Visits the Business

Can a merchant cash advance provider come and take your inventory out of your business? It depends. A sales agreement doesn’t alone give the finance company a security interest in your business assets. Only if your agreement says you’re granting one and you default can the MCA funder repossess assets without a court order. And then, it can only repossess without a breach of the peace. Otherwise, they have to go to court first.

Who They Are

The first question you must ask when someone arrives to collect on your debt is who they are. Whoever is standing at your door has some paper. Maybe it’s a Uniform Commercial Code (UCC) financing statement that they filed with your state. Maybe it’s a Confession of Judgment (COJ). Maybe it’s some other order. They each represent different things. A UCC financing statement isn’t typically given to the courts. It’s not part of any court order. It merely tells others who might want to lend to you that the party filing the UCC claims a security interest in whatever it’s referencing in the filing. A court order is what you get when the other side of the sales agreement sues you in court for breach of the contract and wins. That order gives them the right to a remedy--the right to collect money or other value from you.

The next question you must ask is whether the agreement between you and the funder makes clear that inventory--and which inventory--is covered. The UCC allows for many different classes of collateral to be pledged. Your agreement may or may not cover the inventory about which they’re claiming repossession. Having the specific terms at hand is critical. A UCC filing isn’t dispositive. In most states, it’s good for five years. The only way to extend it is to file a continuation statement.

If the finance company does have the right to go and take your stuff, they can only do that without a court order if they can do it without a breach of the peace. After default, the funder does have the right to require you to get the collateral to a place reasonably convenient to both sides to turn it over. So do not escalate. Make sure you keep everything in writing, including any messages with the funder.

If there is a judgment, which court issued it? A confession of judgment (COJ) can be used as an alternative to suing, but only where the law permits it. It means you acknowledge you owe the money or other value and agree to pay it. In New York, a confession of judgment has to be filed in a county where the defendant lived at the time of the confession or lives now. For a business, it has to be filed where the business has a place of business. The FTC alleged that a merchant cash advance provider, RCG Advances, used confessions of judgment to seize owners’ personal and business assets beyond what their contracts allowed, and that it sometimes threatened physical violence.

Every Aspect of the Sale Must Be Commercially Reasonable

If they did have the right to take your collateral, every aspect of the sale must be commercially reasonable--the method, manner, time, place, and terms. In a commercial transaction, the secured party has to give notice of its intent to sell the collateral, with 10 days’ notice usually being enough under the UCC. You have the right to redeem the collateral at any time before they collect, sell, contract to sell, or keep it to satisfy the debt. For that you would pay all of what’s secured by it plus reasonable expenses and attorney’s fees. If the funder failed to comply with any aspect of the requirements of the law in taking your collateral, then they’re liable for losses. That doesn’t mean they won’t make life difficult for you.

Every Notice or Document

You should first save every notice or document that arrives and note the day and time you receive it. That saves questions of how much time you have to respond. Don’t ignore any court papers. Don’t move assets, switch accounts, or sign anything under pressure.

If the business just can’t keep up, think about talking to a bankruptcy counsel. A bankruptcy petition automatically stays acts to enforce a lien against estate property. The best thing you can do is to consult a lawyer right away. As with many things, delaying can only compound your problems.