Staffing Agency MCA Debt: 6 Reviews of Payroll Funding and Competing Receivable Claims

When a staffing agency takes a merchant cash advance, and then later brings in a payroll funder or factor and both claim the same customer invoices, the first to file usually wins on paper, but who the client was told to pay, cash already in the bank, and payroll taxes also affect the outcome. Six different things will help you decide.

Selling existing accounts receivable to a factor is like selling your house today: you give up title now. A merchant cash advance is the conditional sale of receivables that don’t yet exist. There are technical differences between the two, but both buyers may well do a UCC filing.

If your staffing company later entered into a factoring relationship, the MCA claims they have the right to collect a share of all receivables. The factoring company then starts buying those same invoices and paying for them. Each side wants to believe that the court will recognize their claim on the receivables, but the file date of their UCC, and other circumstances, sometimes contradicts that claim.

UCC-1 Financing Statement

Who filed first isn’t the first question you need to answer but it’s the first thing most lawyers look at. A UCC-1 financing statement gives notice to the world that someone is claiming an interest in collateral you’ve described. The person who files a financing statement first (all else being equal) is usually entitled to payment before the person who files the same kind of statement last.

The buyers expect to get paid by your clients. A question that must be answered is which of the buyers are your clients actually paying. Until notified in writing of an assignment of receivables, paying the staffing agency counts toward the debt. After that, it does not. Your client can demand proof that it’s been assigned to the funder. If the customer doesn’t get it quickly, it can keep paying you. If both buyers receive payments, you need to figure out which of your clients are paying the factor and which are paying the MCA.

But once money has already gone into the staffing agency’s bank account, which of the buyers has the rights to take that money? Here is a practical fact that may trump the paper fact of having first filed for a security interest. While a lien follows the collateral, and the lien holder can repossess the collateral if it ends up in someone else’s possession, things are different with money. Once money gets out of the debtor’s bank account and into the creditor’s account, the creditor generally gets to keep it. This is true even if the bank had a lien on the debtor’s account. One important exception is when the subsequent taker colluded in the withdrawal. In October 2024, an Ohio appeals court said a bank with a first priority interest in receivables could not sue an MCA funder for taking the money out of the company’s bank account, absent collusion.

The IRS can also come after you for unpaid payroll taxes. The penalty is 100% of the withheld tax in the form of a Trust Fund Recovery Penalty. Worse, paying funders while the taxes go unpaid can count as a sign of willfulness. On a deposit more than 15 days late, the employer is responsible for a penalty of 10% of the unpaid taxes.

A Loan in Disguise

Some transactions are labeled as sales of receivables and written as if they are sales but actually are loans. You need to be careful about how the agreement is written. Courts try to decide how close a contract is to either a receivable sale or a loan. They look at three things.

• (1) Is the term stated in days or months or is it open ended?
• (2) Does the contract have a reconciliation clause?
• (3) Does the buyer have recourse if you file for bankruptcy?

Courts in New York look for a reconciliation clause to decide if this is a loan in disguise.

If it is a loan and the interest rate is high enough, you might be able to get out of the loan because it was usurious. A lender can’t make more than 25% a year on a loan. That’s the criminal usury limit in New York, and a felony. In January 2025, the New York Attorney General obtained a $1.065 billion judgment against Yellowstone Capital, in a settlement over advances it said were disguised loans.

Document Collection and Review

There’s no substitute for the results of a thorough document collection and review, but some elements are more important than others. Start with the UCC filings. Find all the financing statements on file against the staffing company. Review the contracts for both the factoring and the MCA. Look at the bank statements. How often did the agency deposit client checks? Often enough to pay both creditors? A competent lawyer should be able to compare your agreements with others, tell you if there is a reconciliation clause, and advise you on your defenses.