What you need to know about UCC 9-406 and how to protect your interests.
Merchant Cash Advance (MCA) providers have gained a reputation for aggressive collection tactics, but one of their most disruptive and legally questionable strategies involves the misuse of UCC 9-406—a provision meant to protect secured lenders.
When misused, this tactic redirects borrower cash flow away from secured lenders, undermining financing relationships and creating chaos for businesses caught in the middle. Here’s what business owners and lenders need to know.
What is UCC 9-406
Under UCC Article 9-406, when a lender has a security interest in a company’s receivables, they have the right to notify the business’s customers to pay the lender directly—instead of the borrower. This ensures that a secured lender can collect on the collateral that secures their loan.
In theory, this provision is meant to provide clarity in structured lending relationships, particularly for asset-based lenders (ABLs) and factors.
In practice, MCA providers have found ways to manipulate this system—weaponizing these redirection notices to seize receivables, even when they have no legitimate legal claim.
How MCAs Exploit 9-406 to Divert Funds
MCAs routinely send these sweeping redirection notices to a borrower’s customers, instructing them to send payments directly to the MCA instead of to the business. These notices are often:
- Overbroad—Targeting all accounts receivable, not just those tied to an MCA advance.
- Legally dubious—Lacking proper lien priority or contractual authority.
- Confusing to customers—Many account debtors comply simply to avoid potential liability, even if the notice is invalid.
The result? Borrower cash flow is hijacked, disrupting operations, impairing borrowing bases and leaving secured lenders scrambling for control.
The Damage to Secured Lenders and Businesses
For ABL lenders, factors and traditional financiers, this tactic turns a manageable distressed credit into an immediate crisis:
- Borrower’s cash flow is disrupted, making it difficult to cover payroll, suppliers or operating expenses.
- Lenders lose control over their collateral, increasing risk and leading to potential defaults.
- ABL relationships are compromised, forcing lenders to accelerate loans or exit entirely.
- Legal battles ensue, but by the time a court rules, the damage is often irreversible.
Protecting Against MCA 406 Abuse
While legal challenges may eventually invalidate fraudulent 406 redirections, prevention is the best defense.
Proactive steps include:
- Tightening Loan Agreements: Clear contractual provisions restricting unauthorized assignment of receivables.
- Article 9 Restructuring: Cleansing receivables through a transaction-based reorganization.
- Educating Account Debtors: Ensuring customers recognize legitimate redirection notices from fraudulent ones.
The Bottom Line
MCAs have evolved their tactics, and UCC 9-406 abuse is one of the most dangerous for business owners and lenders alike. If left unchecked, it can cripple cash flow, destabilize financing relationships and force early lender exits.
- Business owners: Be cautious when taking MCA funding.
- Lenders: Stay ahead of MCA tactics and protect your security interests.
If you’ve encountered 406 redirection interference, let’s talk—there are solutions to restore control before it’s too late.