The MCA ACH Pull, the Return Code, and What a Bounce Sets in Motion: 5 Checks

An unpaid ACH is a banking event. When that happens, the bank will send an R01 or another return code which will be received within two banking days. A bounced ACH is not the same thing as a default. And the first return code off the bounce does not lock anything down for anyone. Whether or not it counts as a default, and what happens next if it does, is written in the contract.

Make sure it came back as an R01 rather than as some other return code. The R01 is a non-sufficient funds return code. If you get a different code, something might be wrong. Another return code that might show up is an R29. An R29 means you told the bank you did not authorize that debit. On a business account, you don’t have the 60-day window to bounce an ACH entry, like you would if the account were a consumer account; the R29 return has to be issued within two business days from the day it settles.

If the original entry is bounced once, maybe the other side will take a second try, or even a third, before they want to close things down and call things a default. The rules around this are in the NACHA Operating Rules and Guidelines. Basically, the rules limit an R01 to two more tries within 180 days after it settles in your account. Each of the new entries must say RETRY PYMT in the description, and have the same company name and ID as the original, plus the same amount. And if the new entry breaks one of those, your bank is allowed to bounce it as an R10 unauthorized return, but it needs your written statement first.

Whether a bounce is a default needs a look at the financing agreement. Read it - every single word of it - to see what it calls a default. The way it is written is the only way that counts. Don’t assume anything in advance. Look for a definition that tells you what an event of default is. If it bounced because your account didn’t have enough to cover it, but nothing in the financing agreement says that being short in your account would amount to a default, then it didn’t mean a default. However, if the financing agreement says a bounced entry alone would be a default, then it was that default. If there was an error, it depends on whether there’s a reconciliation process in the agreement or not. Either way, you will need documents to demonstrate the reason it bounced. And a request to the funder may not stop the next scheduled debit right away.

Write to the funder promptly, starting by confirming to your financier what return code you received and when, and ask for its process in writing. Whatever you do, keep a copy of the note with everything in it. Hold on to statements and processing reports, and keep notes on the what-when-how of it. If a new schedule is agreed, get it in writing, not just over the phone.

A bounce is not a freeze, either. In a UCC filing (uniform commercial code) lien, there may not be a tie to your bank account specifically; it may be more a statement of a lien on assets, generally. In itself it’s a notice, not a freeze. An order restraining or freezing funds is a legal order - something from a judge, a tax authority (who have their own set of laws for collection) or your bank. A bank may freeze an account or money in it if its doing it for its own reasons - meaning its rules.

That said, the exact rights of a buyer to the collateral depends on the contract’s details, and on the wording of the lien itself. Depending on those, a secured funder may reach receivables or deposits, and a judgment is not always needed first. If your bank blocks any account functions, find out why, and see what process it’s going through. Ask it for the actual notice and the amount affected. And the rules around what your bank can do to your account can change if there are legal papers in hand. Call a lawyer quickly if legal papers show up.

A notice and a court order are not the same thing. A letter, email or conversation is not an order of the court; a judge’s signature, on the other hand, is an order. The difference is critical when it comes to your next step. Just because a letter comes in telling you the game is over, it doesn’t mean the game is over. It’s the rules of the agreement, not what anyone claims, that run the actual process. If a default notice has you take actions or stop actions, read it like a contract. See what obligations it puts on you, which contract sections it cites, which exact words it calls a problem, what it demands and in what time. Don’t assume the notice is correct by default.

The Confession of Judgment

Confessions of judgment are a unique problem. The status of a judgement depend on your contract and on state laws that vary. In New York, since August 30, 2019, the confession of judgment can only be filed in the county where the debtor lived at signing, or the county where the debtor lives at filing, though government agencies can still file anywhere. New York courts ask if an MCA is really a loan. In LG Funding (2020), an appeals court weighed three signs of a loan: no reconciliation, a fixed term and the ability to go after the business if it went bankrupt. If it is a loan, knowingly collecting over 25% a year interest is a felony there.

Put the pressure on paper. Monthly sales fall from $60,000 to $48,000, while financing remittances stay at $9,000 a month. It adds up to your share climbing from 15% of sales to 18.75%. That is serious pressure, but it doesn’t mean it is a legal default. You need a cash calendar, full bank statements, and sales records. To make a cash calendar for your business, build a master spreadsheet by day, laying out each of your expenses and payments. Gather the documents that can make your case, and ask about an adjustment or a workout. And seeking another funder may add to the strain, so compare its full cost and schedule first.

Stay focused on the particular facts of your situation. Deal with the problem you have in front of you. And be precise with words. The bounced ACH is a return; a default (if it is one) is a contract claim; a levy, a restraint or a claim in court is legal. In the end, you cannot simply rely on the common wisdoms that bounce around the industry on this. You need documents for starting a request and plans for process, not scare stories.