Car Wash Owners: 6 Reviews of Equipment Liens and Stacked MCA Debt

When a car wash has multiple merchant cash advance loans, the first thing is usually getting clear on what exactly got filed for each. MCA funders can file UCC-1 blanket filings that can reach far beyond receivables, up to and including equipment. The second thing to be sure on is exactly who filed before the business took on the second or third advance. The priority order typically follows the filing order. Before a default, this means checking exactly what the first advance filed, and how each one after that filed its paperwork. Before you assume anything, take time to confirm six things.

What Each Funder Filed and When

Start by checking exactly what each funder filed and when. This can clear up exactly what collateral the advance is filed for, and what order those filings were made. You shouldn’t assume anything until you’ve checked what was filed, with what filing numbers and by which lender. A typical UCC-1 filing stays in effect for five years unless it is continued.

The collateral description used in commercial UCC-1 blanket filings isn’t boilerplate. A financing statement can be for all present and after-acquired equipment, all accounts and receivables, all inventory, and everything else in the debtor’s name. There is no good news for the second lender, who finds themselves competing for the same collateral that the first lender already laid claim to.

Car washes that have equipment loans also may have a lender in the top priority spot. An earlier blanket lien does not necessarily beat a purchase-money lender. A purchase-money equipment lender will beat a blanket lien on the same equipment if the equipment lender perfects its filing within 20 days of the equipment’s arrival.

For example, Funder A filed January 1 and the others filed later. There is $200,000 of collateral. In that case, Funder A is owed $300,000, so it can take all of the collateral. Funders B and C may still have valid claims, but they get nothing from that collateral. The date the loan was closed is not always the date that decides who gets first access to collateral. Usually the relevant date is the date that the security interest was perfected.

The next issue is whether any prior advance contracts were broken. Some MCA agreements bar taking other financing. Breaking that can be a default by itself. Some have cross-default clauses. In that case, miss one ACH payment to Funder C, C declares default, and maybe B and A too. One funder’s problem becomes several. You should be aware of exactly what agreements you have signed that could cause a default with one lender when another lender declares a default.

Taking a new MCA may help pay bills, but it usually does not solve a cash problem. A new MCA adds another payment, more debt to service, and another creditor with a lien.

After default the secured lender can take back the equipment or disable it and sell it on the premises. In that case, it does not have to go to court first. To be legal, the lender must do it without breaching the peace. If you, a guarantor or another lienholder want to redeem collateral, you can usually do so by paying the full secured debt plus expenses and attorney’s fees. But, this right stops when the lender sells the collateral or keeps it.

New York Law

A car wash borrower outside of New York can be subject to New York law. Contract terms can make either New York law or New York courts apply to a deal.

In New York a court can look at whether the repayment really did depend on revenue, and if the reconciliation process was actually real. A court can decide that a cash advance was really a loan. If it is a loan, knowingly charging above 25% a year is criminal usury, a class E felony. That can affect any lien based on the deal. Since 2019 New York law allows filing for a confession of judgment only if the debtor is in New York. That can include having a place of business in New York. Don’t ignore a New York judgment.

Another route is bankruptcy, which can put the entire MCA stack of claims in one room. Having the right to automatic stay typically stops debt collection, foreclosures and seizing collateral. A small business may qualify for a subchapter 5 bankruptcy to reorganize. In bankruptcy, the secured claim is secured only up to the value of the collateral. The rest of the claim is unsecured. A secured creditor can ask the court to lift the bankruptcy stay for cause. This can include when the secured creditor doesn’t have adequate protection for the collateral.

Junior funders are not necessarily small potatoes. If they are not getting paid, they can go after personal guarantors. Settling with one funder alone can just shift the pressure to another funder later. When there are several funders to deal with, make sure a settlement offer works together with any other settlements. Car washes can benefit by getting a consolidation offer reviewed before they sign.

After default, funders can use ACH withdrawals, lawsuits, UCC enforcement, and claims against guarantors. With several funders these overlap fast. Once accounts are restrained or judgments are entered, the options shrink.

Don’t wait until a lender declares default. Get all the agreements that you signed up front, and get them now. Review them as a group. Take inventory of what each creditor has and when they have priority. Separate out what is equipment and what is accounts. Think before you sign another agreement. Don’t just look at the lien stack, think about legal rights. At this point look at your options in view of what can still be worked out before one of these funders sues you or freezes your bank accounts.