I’ve written extensively about MCA-related issues for lenders and borrowers over the past several years. At the recent IFA conference in Nashville, I was struck by the need for more robust conversations around actionable MCA solutions for the factoring industry. Because they exist, yet still aren’t a part of every factor’s knowledge base and tool kit.
Beyond conventional approaches centered primarily on negotiation or legal process, there are two restructuring pathways which can resolve MCA liabilities off the balance sheet entirely, in a commercially relevant time frame – so factors can get into, or out of deals, previously mired in stacked MCA obligations.
With an understanding of Article 9 restructuring or alternatively, ‘credit rehabilitation’ restructuring, 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 these tools to control collateral outcomes and protect lending relationships.
Overview: Two MCA Solution Frameworks Defined
Article 9 Restructuring: This refers to an out of court, non-bankruptcy process which removes all liens and liabilites from assets under commercial law, in approximately 4-6 weeks. This form of restructuring involves a current senior lender’s secured party sale of assets to a new operating entity, wherein a clean new balance sheet allows for factors to take a clean first position lien on accounts receivable.
Credit Rehabilitation Restructuring: This refers to a stepped process whereby first, MCA payment obligations are reamortized – pegged to an acceptable debt service coverage ratio (DSCR). This allows the business to stabilize, rebuild its cash and collateral position over 4-8 months, and postion the business for a secured finance take-out, which was not previously possible when the collateral base did not meet the MCA pay off obligation.
Where Conventional Wisdom Fails
The truth is, most of what factors have been told about dealing with MCAs is incomplete and, as a result, not particularly useful for business development or for working through distressed credits. The common approaches – calling MCA providers, negotiating reduced payoffs, sending cease and desist orders – do not consistently produce commercially relevant outcomes within the timeframes that matter.
In my personal experience, year after year, at conference after conference, the response to MCA exposure is usually straightforward: if there is enough eligible accounts receivable to take out the MCA positions, the deal can be done. If not, the factor cannot step into a clean first-priority position, and the deal is declined.
That constraint is real, but it is not the whole story.
“I’ve closed multiple deals that were otherwise not financeable because of MCAs. An Article 9 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,” Curt Powell, nFusion
The circumstances are familiar. By the time many of these prospects reach a factor, they have already taken on multiple MCA positions that exceed the available collateral. The business may still be operating. Customers may still be paying. The AR is attractive, but the opportunity has reached the factor at a point where MCA encumbrance means the numbers don’t support a takeout.
A large portion of the advice in the market, whether for originations or portfolio situations, focuses on trying to work within that existing structure. Call the MCA providers. Negotiate a payoff. Send legal notices when UCC 9-406 payment interference becomes an issue.
On the surface, those approaches seem pragmatic. The issue is how they perform against how MCA positions are actually structured and incentivized – because much of the conventional guidance loses real-world relevance when viewed through that lens. In truth, this is why most factors simply pass when the MCA stack exceeds the borrowing base: the conventional remediation tools are often viewed as commercially impractical, fragmented, or insufficient to reliably create a financeable outcome.
To understand why conventional ‘negotiation’ approaches are often insufficient on their own, it’s useful to understand that MCA providers are not focused primarily on principal recovery. Their economics are based on yield. Furthermore, their agreements give them strong collection leverage. As such, they are not incentivized to exit positions early or to cram down obligations that facilitate a refinancing.
Most of the approaches commonly discussed – calling MCA providers, negotiating payoffs, pursuing legal remediesl – attempt to work within that structure. In practice, they tend to run into the same constraints created by those incentives.
“Negotiation alone rarely produces meaningful relief because the agreements themselves grant MCA providers substantial collection rights, including the ability to sweep accounts and extract payment directly, reducing any reliance on voluntary cooperation. In parallel, tactics such as UCC 9-406 payment redirection notices are frequently used to introduce confusion into the receivables flow, regardless of whether a valid basis for redirection exists. Where multiple MCA positions are involved, the incentives become misaligned. Each counterparty is effectively acting to maximize its own recovery in real time. In that environment, there is little reason to renegotiate, and negotiation does not resolve the underlying pressure.” Adam Duso, CEO, Second Wind Consultants.
In MCA situations, one of the most common collection tactics employed by MCA providers is the issuance of UCC 9-406 notices to account debtors in an attempt to redirect receivable payments or otherwise disrupt the receivables stream. With the intervention of legal counsel, the appropriate payment direction can ultimately be reestablished. During that process, payment delays can disrupt cash flow, shrink the borrowing base, and impair collateral before the matter is resolved. In MCA scenarios, time is the enemy of the business.
The same applies to negotiation. Some MCA providers will engage. Others will not. Some will delay while continuing to collect. There is no mechanism that ensures coordinated participation across a stack, and no requirement that a given provider accept terms that allow it to be taken out. Anything short of broad participation does not produce the outcome a factor is working toward.
Origination vs. Portfolio: Same Constraint, Different Entry Points
It helps to separate how this shows up in practice.
On the origination side, the issue is straightforward. A prospect comes in with multiple MCA positions, and there is not enough eligible receivable to take them out in full. The AR may be attractive. The business is still operating. But the collateral base, at that moment, doesn’t support a payoff. The deal is declined.
On the portfolio side, the situation is different. The factor is already in the deal. The borrower takes on MCA positions after the fact, and the impact shows up through performance.
Remittance becomes inconsistent. Dilution increases. Cash flow becomes less predictable. In some cases, account debtors delay payment in response to 9-406 notices. In others, MCA providers sweep operating accounts, pulling cash out of the business in a way that affects its ability to perform. The receivable base begins to erode, not because the underlying customers have changed, but because cash is being disrupted.
At that point, the factor is not looking to originate a deal. It is trying to stabilize or exit an existing one.
Refinancing out is no longer an option. Another lender will face the same constraint – junior liens from MCA positions that cannot be cleared with the available collateral. The borrower is effectively stuck, with a deteriorating position.
Whether the issue shows up at origination or inside a portfolio, the underlying constraint is the same. The MCA stack sits in front of the receivable base in a way that prevents a clean first position.
The restructuring mechanics, however, are the same in both cases.
Two Paths That Actually Resolve MCA Situations
The first is a structured reset through an Article 9 restructuring process.
This is an out-of-court, private process that runs through the incumbent senior lender. The operating assets of the business are transferred through a commercially reasonable sale into a new entity, free and clear of prior liens and liabilities under UCC Article 9. The business continues operating, but the legacy MCA obligations do not follow the assets.
This process does not depend on coordinating multiple MCA providers. The timeline is typically four to six weeks, driven primarily by the diligence requirements of the incoming lender. In an insolvency scenario, such as stacked MCAs, the process runs through the senior lender, who provides notice to junior creditors of a secured party sale conducted in accordance with commercial reasonableness. Going-concern assets are financed by incoming secured lenders within the new operating entity, with a clean balance sheet.
“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, SLR Business Credit
From a factor’s perspective, the outcome is direct. The MCA positions are no longer part of the capital structure. The borrower is operating without those obligations. The receivable base can be evaluated on its own terms, and a facility can be put in place in first position.
More importantly, the restructuring resolves many of the collateral-control issues that concern factors in distressed situations. Improper UCC 9-406 payment diversion efforts cease with the legacy MCA structure, customer payment confusion is eliminated, cash flow stabilizes, and receivables once again flow through a lender-controlled structure. The result is not merely a cleaner balance sheet, but a cleaner collateral position, allowing factors to underwrite the receivable base on its own merits rather than through the distortions created by MCA interference.
“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, Senior VP, Advantage Business Capital
This path becomes necessary when the MCA burden has reached a level the business cannot support, even if payments were reduced. In those cases, there isn’t a workable reamortization. There is no payment level that stabilizes the business while the existing structure remains in place. Removing the stack is the only way to create a financeable position.
By fully resolving assets of all liens and liabilities, incumbent lenders can be refinanced out at asset value, without regard to subdebt, and incoming lenders leverage a previously inaccessible opportunity to finance attractive collateral without regard to previous MCAs or other liabilities.
“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.
Article 9 Restructuring in the Real World
As recently reported in ABF Journal, Sallyport Commercial Finance recently exited an over-advanced factoring relationship through an Article 9 restructuring involving a Hawaii-based trucking and logistics company.
The borrower had accumulated approximately $800,000 in MCA obligations on top of its facility, creating pressure on cash flow and a growing collateral shortfall.
Through the Article 9 restructuring process, MCA debt was removed and the business was able to be sold as a going concern to a strategic buyer, financed by an incoming ABL, allowing Sallyport to exit in full.
The result was a clean recovery and continuity for a key regional logistics operation.
In another example reported previously in ABF Journal, Pathward (previously Crestmark) exited a distressed credit involving Handaband USA, an oilfield services company, through an Article 9 restructuring.
The company had taken on approximately $1.5 million in MCA and other subordinate debt on top of its existing facility, tripping covenants and precipitating payment default. Through the Article 9 process, the business operation was transferred to a new entity free of the subordinate obligations, allowing an incoming ABL lender to take out Crestmark in full, while stepping into a performing credit which has scaled 3x since origination.
Credit Rehabilitation Restructuring
In some situations, the business can support a different payment profile, but not the one it currently has. The objective is to reduce pressure on the business so it can continue operating and rebuild its receivable base.
This is where most of the guidance of questionable practicality in the market shows up. “Negotiation” is often presented as the solution. In practice, negotiation on its own is not likely to efficiently create the conditions necessary for financeable takeout. MCA providers who are collecting daily do not have a reason to materially reduce payments simply because they are asked to. Some will engage. Others won’t. Partial participation across a stack is unlikely to align a takeout with the borrowing base.
Rise Alliance, a firm focused on the rehabilitation of MCA-distressed businesses, operates within a credit rehabilitation framework in which negotiations are conducted in the context of senior lender priority and established creditor rights. This creates practical leverage that simple request-based negotiation does not. The objective is to create a sustainable payment structure that stabilizes cash flow, preserves collateral, and positions the business to return to secured finance within a commercially relevant timeframe, often approximately four to six months. At the same time, it avoids the indiscriminate payment cessation tactics common among questionable Main Street “debt relief” shops and not recommended by legitimate restructuring professionals.
Michael Petrecca, CEO of Rise Alliance, notes that the issue is not merely obtaining reduced payments, but whether the resulting structure actually restores financeability:
“There’s no shortage of MCA ‘relief’ firms that will, to some extent, renegotiate payment terms. But rarely in that space are those new payment terms pegged to a first position coverage ratio, which must be the case in order to consider the business stabilized. Even then, the business generally hits a brick wall, unable to refinance out those settlements, and remains trapped in them, unless there is a plan to position them for conventional underwriting.”
One of the more common MCA pressure points is the use of UCC 9-406 notices. In MCA cases, those notices are sent without the legal standing required to redirect payments. They work because they create confusion at the account debtor level, not because they are valid. When that mechanism is challenged and neutralized, it removes one of the more disruptive tools MCA providers use to interfere with incoming receivables.
There is also the way these agreements are repaid. MCA agreements are structured around a percentage of receivables, but in practice are repaid through fixed daily withdrawals. When revenue declines and those withdrawals represent fixed payment amounts, the collection will exceed what the agreement contemplates. Reconciliation provisions exist in these agreements, but in practice they are not granted.
“Most business owners don’t even know they have a right to reconciliation — and even when they do, the process is often designed to fail,” says Gerard Celmer, Chief Operating Officer at Rise Alliance. “MCA funders will claim the right exists, but then impose layers of opaque documentation requirements and tight procedural deadlines. If anything is out of order or delayed, the request is deemed withdrawn. It’s how they deny the right without ever saying no.”
When those dynamics are addressed – challenging improper payment redirection and confronting over-collection relative to contractual terms – the posture changes. The objective is not to compel agreement, but to remove the mechanisms that allow collection to continue without regard to underlying performance or senior lender priority and interests.
“When a business is operating in a zone of insolvency, the analysis shifts. The focus is no longer on strict adherence to payment mechanics in isolation, but on whether actions preserve or impair collateral for the benefit of senior secured creditors. In that context, steps taken to stabilize cash flow and protect receivables may be not only defensible, but required,” adds Shane Heskin, Heskin & Proper PLLC.
When it is done correctly, the business stabilizes. Cash flow becomes consistent. Customers continue to pay in the ordinary course. The receivable base rebuilds. Over time, that can bring the company to a point where there is enough availability for a factor to step in and take out the remaining obligations in full.
For example, a staffing company faced approximately $500,000 in MCA obligations with scheduled payments totaling roughly $22,500 per week over the following six months. The payment burden had become unsustainable relative to the company’s cash flow, prompting management to approach a factoring company in an effort to refinance the MCA stack. However, with only approximately $450,000 in eligible accounts receivable, there was insufficient collateral availability for a factor to advance enough capital to retire the MCA debt.
Working with a turnaround professional, the company ultimately negotiated a payment reamortization, bringing weekly MCA payments down to approximately $7,500 per week – to align with the company’s operating cash flow while allowing the business to stabilize. With that payment relief in place, management was able to redirect capital back into operations and marketing, driving more than 20% growth in sales over the following six months.
As revenue increased and the business regained stability, eligible accounts receivable grew to approximately $650,000, while the MCA balance declined to roughly $320,000 through the reduced payment structure. At that point, the company had sufficient collateral support for a factoring facility to refinance the remaining MCA obligations and provide additional working capital to support ongoing growth.
Non-Adversarial Approaches to MCA Resolution
Neither of the restructuring frameworks discussed above is fundamentally adversarial toward MCA creditors. In fact, both are designed to preserve enterprise value and improve recovery outcomes relative to the alternatives once a business enters distress.
In staked MCA situations, when continued performance under the existing payment structure has become unsupportalbe, the alternative in insolvency is typically business failure and liquidation. When a business reaches that point, junior creditors often face limited recovery prospects beyond enforcement of personal guarantees (or in the case of MCAs, performance guarantees) and collection efforts against individual owners.
Article 9 restructuring addresses that reality by preserving the operating enterprise as a going concern. While MCA obligations are discharged in the asset transfer under commercial law, the business itself continues operating, and the MCA guarantor may continue earning from within the new entity, greatly increasing MCA recovery value – materially exceeding what would be expected in any alternative scenario.
Credit rehabilitation operates from a cooperative premise. The objective is not debt reduction, but debt repayment through a sustainable structure. Payment obligations are reamortized to align with the company’s actual cash-generating capacity, allowing operations to stabilize and collateral value to recover. When successful, creditors are repaid in full over time while the business remains intact and financeable.
Viewed through that lens, both approaches seek the same outcome: preserving value, maintaining operations, and maximizing recoveries that would otherwise be impaired by continued financial deterioration. The difference lies not in whether creditors are paid, but in selecting the restructuring framework most likely to produce a viable result under the circumstances.
Conclusion
Most factoring pipelines are built around what works at first look. Either there is enough collateral to take out the MCA stack, or there isn’t. But when MCA encumbrance bottlenecks orginiations or exits, factors should understand the tools at hand and work in strategic alliance with a restructuring partner to execute them.
An Article 9 process can convert a declined deal into a financeable opportunity within a matter of weeks.
“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.”
Alternatively, a credit rehabilitation process can move a business from unworkable to viable over a longer period as the collateral base rebuilds.
This applies to business development and to existing portfolios. MCA exposure inside a portfolio shows up through remittance issues, dilution and inconsistent cash flow. The same two paths apply. In some cases, the situation requires a reset. In others, stabilization is enough to restore performance.
There needs to be enough receivable to take out the MCA stack in full. What changes is how often that condition can be met. Access to restructuring pathways doesn’t change underwriting standards. It changes how many opportunities can reach them.