For factors and secured lenders, business distress often means opportunity lost. When an applicant is overleveraged with MCAs or a current client faces insolvency because of their involvement, it can appear there is no viable path forward.

Lenders often exit factoring relationships that have deteriorated, unaware that the root cause may be MCA 406 notices intercepting and delaying receivables. Factors frequently cite aging receivables, a shrinking receivable base, and customer concentration as reasons to exit a credit, without recognizing that these issues often stem from subordinate debt and aggressive MCA collection tactics. When MCAs use UCC 9-406 notices to divert payments, it triggers a downward spiral—receivables age, cash flow erodes, and the pool of future receivables continues to shrink, ultimately destabilizing the relationship.

However, ABLs and factors are not at the mercy of MCAs when it comes to business development or exiting strained credits. With the proliferation and ever-increasing presence of these vehicles, secured lenders must proactively utilize the tools at their disposal to control collateral outcomes and protect lending relationships.

One such tool available to senior lenders is an Article 9 balance sheet restructuring, which provides a path for secured lenders to regain control of distressed credits impacted by MCA encumbrances.

The Growing Challenge of MCA Encumbrance

Factors and ABLs frequently encounter businesses burdened with multiple layers of debt—traditional bank loans, vendor obligations, credit lines, and increasingly, MCAs. These short-term, high-cost cash advances create significant challenges for lenders, as the associated receivables are often subject to blanket liens or aggressive collection tactics.

MCAs pose a unique threat to secured lending because they operate outside traditional financing norms. Unlike conventional lenders that negotiate intercreditor agreements and assess specific collateral, MCA companies impose questionable claims on a business’s entire future revenue stream, regardless of whether it was previously pledged as collateral. Their direct access to operating accounts allows them to siphon cash flow unpredictably, creating financial instability for borrowers and complicating the secured lender’s position.

Moreover, in default scenarios, MCA providers frequently issue UCC 9-406 redirection notices, instructing account debtors to pay them directly. Despite lacking judicial oversight, these notices often cause confusion and compliance among recipients, disrupting existing lending relationships and starving businesses of critical working capital.

In business development, MCA encumbrance has traditionally meant the lender has had no options unless the borrowing base and advance rate were sufficient to refinance the debt stack. However, even when sufficient collateral may exist, ABLs and factors often struggle to align all MCAs in a stack for a timely take-out transaction.
 
“Even if we love the company, scraping together enough accounts receivable, inventory, equipment and real estate to lend against to pay off the MCA debt is a huge challenge in itself. This doesn't even take into account their overhead, payroll and accounts payable,” said Curt Powell, SVP Business Development, nFusion Capital.

MCAs also create bottlenecks and inefficiencies in existing portfolios where MCAs appear on a client balance sheet despite covenants and lender best practices. The result often erodes the business operation and the value of securitized A/R while struggling borrowers push their lenders for increased LTV. For the lender, these same circumstances that have eroded the credit can now make it increasingly difficult to exit.

MCAs operate outside the traditional order of priority established by the Uniform Commercial Code, often disrupting the rights of senior secured lenders. Their ability to initiate daily ACH withdrawals, sweep bank accounts, and intercept receivables undermines senior creditors’ collateral positions and creates significant risk within a lender’s portfolio. By imposing excessive fees and extracting aggressive daily or weekly payments, MCAs drain the debtor’s cash flow, limiting its ability to sustain operations, purchase inventory and generate new accounts receivable.

This erosion of working capital reduces the overall collateral base available to first-position lenders, often prompting asset-based lenders (ABLs) and factors to exit a credit due to shrinking loan availability or underperformance. Additionally, MCA interference in receivables collection can extend payment cycles to the point where accounts become cross-aged or ineligible within a borrowing base, further constraining first-position lending and accelerating lender exits from otherwise viable credit facilities.

MCA Abuse of UCC 9-406: Undermining Lender Rights

One of the most aggressive tactics MCAs use to interfere with secured lenders is the misuse of UCC 9-406, which governs account debtor obligations when a security interest in receivables has been assigned. In theory, this provision allows a properly perfected lender to direct account debtors to pay them directly. However, MCA providers frequently weaponize 406 redirection notices without clear legal standing—bypassing traditional lien priority and disrupting secured lending relationships.

By issuing sweeping redirection notices to account debtors, MCAs attempt to cut off a borrower’s operating capital at the source. Even when these notices lack legal validity, many account debtors comply out of confusion or to avoid perceived liability. This directly undermines a secured lender’s control over its own collateral, restricting cash flow and impairing the borrowing base.

For ABLs and factors, this tactic can turn a manageable distressed credit into an immediate exit scenario, as the receivables securing a loan are suddenly diverted to third-party MCA providers with no obligation to return the funds. The impact is not just lost collateral—it’s the erosion of confidence in a lender’s ability to maintain its security position.

Legal challenges may eventually overturn illegitimate 406 redirections, but by the time a resolution is reached, the damage is already done—working capital is drained, borrowing bases are impaired, and lender exits become inevitable. This is why proactive measures, such as Article 9 restructuring, are critical safeguards against MCA interference. By moving assets into a new entity and re-establishing a senior lender’s priority position, ABLs and factors can eliminate the risk of fraudulent 406 tactics before they take hold.

Restructuring: ABLs and Factors Take Control of MCA Challenges

Lenders do, however, have a robust tool to overcome lost business and challenging exits caused by MCAs on the balance sheet.

In today’s lower middle market, distress seems to almost invariably involve MCAs. To address the many issues they cause not only for businesses themselves, but for lenders, many ABLs and factors have become proactive in resolving MCA distress through an Article 9 balance sheet restructuring or ‘Article 9 restructuring’.

First, some background context. Article 9 is part of the Uniform Commercial Code (UCC), the standardized legal framework governing commercial transactions across all 50 states—with some jurisdictional nuances. It specifically governs secured transactions and the enforcement of security interests in personal property. For instance, Section 9-610 provides for a senior secured lender to dispose of collateral in a commercially reasonable manner post-default.

Although this provision is historically associated with formal liquidation (Article 9 “sale”), it can also be used to transition going-concern assets into a new operating entity with a new balance sheet. The ability to separate a business operation from legacy liabilities, simply stated, involves the resolution of assets via Article 9, and relaunching those same assets in a new operating entity, in a manner which preserves full continuity of operations and underlying value.

With borrower consent, adequate consideration and proper statutory notice, assets are sold “in use” to a new entity under new ownership. The original distressed entity retains its liabilities while the business operation emerges with a clean balance sheet in the successor entity.

“In my experience, it is a quick process that allows the company to protect and maximize the underlying value of the assets and satisfy as many of the outstanding obligations as possible. After the Article 9 process, a new senior secured lender can easily perfect its priority position on assets going forward, and allow that brand to quickly resume business operations,” said Gino Clark, SVP, Milberg Factors.
 
ABLs Eliminate MCA Encumbrances

Utilizing Article 9 restructuring allows secured lenders to effectively eliminate the challenges posed by MCAs, facilitating smoother entry into or exit from a credit. Portfolio managers can leverage this process to preserve and stabilize their existing portfolios. Not only does Article 9 restructuring provide a streamlined path for exiting non-performing credits—regardless of junior secured obligations—but it also creates a clean slate by introducing a new entity with a fresh balance sheet. This enables an ABL or factor to fund a new facility as part of the restructuring, free from subordinate creditor interference, ultimately protecting and potentially expanding their lending portfolio.

A key advantage of this strategy in the secured funding space is speed. Judicial resolutions such as bankruptcy 363 sales, ABCs (Assignments for the Benefit of Creditors) or receiverships often take months to complete and can erode business value, goodwill and critical vendor relationships. As such they aren’t truly relevant as a business development strategy. In contrast, the Article 9 process fully avoids judicial process, and is instead led by the senior secured lender.  

Because Article 9 restructuring fully resolves distressed assets typically within weeks, it is an effective tool for originating new opportunities and exiting problematic positions - providing for an ABL to take a first position lien, on a clean balance sheet, without the need to refinance any liability beyond intrinsic asset value.

“I've closed multiple deals that were otherwise not financeable because of MCAs. A balance sheet restructuring is a great option when the collateral just isn't there to finance them out. As a secured lender, I fund into a clean balance sheet and a healthier business,” said Powell.

Another advantage is certainty. When dealing with MCA encumbrances on receivables, removing them from the balance sheet can offer a clearer, more controlled path than protracted take-out attempts or the negotiation of intercreditor agreements in an industry notorious for not observing them.

“Since better familiarizing ourselves with the Article 9 process, we look at certain distressed situations differently now, allowing us to consider more opportunities with prospective companies that need ABL financing ," said Mike Fussell, Managing Director, Aegis Business Credit.

A Win-Win Strategy for Borrowers and Lenders

“This process replaces a failing balance sheet with a clean capital structure, making the company stronger and more attractive to lenders and investors," said Jacen A. Dinoff, KCP Advisory.

An Article 9 restructuring provides an alternative to bankruptcy that safeguards both the business and its employees. Rather than shutting down entirely, distressed owners can remain involved in the new entity as employees, consultants or future stakeholders.

The benefits for secured lenders are equally clear. This process removes the immediate financial threat posed by MCAs. By restructuring the business within a new entity, the asset base remains intact and free of encumbrances, creating a fresh lending opportunity with a first-position security interest.

"It’s an incredibly effective solution. We recently worked with a completely overleveraged and unfinanceable company," says Haze Walker of Lawrence Financial. "Without Article 9, the business would have collapsed. Instead, it was successfully restructured and relaunched, and we were able to provide a line of credit to support its future growth," added Walker.

Despite the growing impact of MCA encumbrances, industry education on lender-driven solutions remains limited—particularly in the factoring space, where these challenges are most acute.

The International Factoring Association (IFA), as the primary trade organization for factors and other secured lenders, is in an obvious position to lead the charge in educating its members on practical tools like Article 9 restructuring.

Yet, much of the industry dialogue on MCAs has centered on identifying risks rather than exploring viable solutions. A greater emphasis on proactive education around restructuring strategies could help secured lenders, including factors, mitigate unnecessary losses and missed opportunities.

For factors and asset-based lenders (ABLs) dealing with MCA-affected businesses, an Article 9 restructuring offers the cleanest, most efficient way to remove financial distress and restore stability to both the client and the lending relationship.