A fire damages your restaurant’s kitchen, forcing you to close temporarily. Your insurance payout could help replace equipment and reopen the business. But if you have an outstanding merchant cash advance (MCA), the funder may claim part of that money.
In New York, whether the funder has a valid claim depends on its security interest and what your insurance payment covers.
When can an MCA funder claim insurance money?
Your MCA agreement may give the funder a security interest, or legal claim, in your business assets. These may include equipment or inventory. The funder may file a UCC-1 form to make that claim public. But filing the form alone does not make the claim valid.
Under New York’s Uniform Commercial Code, a valid security interest may cover insurance money paid for damaged collateral. Collateral is property used to secure a debt, such as your restaurant’s ovens. However, the funder does not automatically have the right to collect that money directly from your insurer.
Does a UCC lien cover every insurance payout?
No. Even if your MCA funder has a valid security interest in damaged equipment, that does not mean it can claim every payment under your insurance policy.
Business interruption insurance generally covers income lost when a business must close or reduce operations. It differs from receivables, or money customers owe your business. An MCA funder’s claim to those receivables does not automatically cover insurance payments. The agreement, insurance policy and state law help determine the funder’s rights.
Several factors can affect the funder’s claim:
- Collateral: Whether the damaged property falls under the security agreement.
- Insurance coverage: Whether the payment compensates for damaged collateral or another loss.
- Security agreement: Whether the funder has an enforceable claim to the insurance proceeds.
These distinctions matter when your business needs insurance funds to recover from a loss.
Protecting the funds your business needs to recover
An MCA funder’s claim does not automatically entitle it to your insurance payout. If a dispute threatens your business’s recovery, an attorney can examine the funder’s rights under UCC lien laws and help challenge unsupported claims or negotiate a resolution. You may have options to protect the money your business needs to resume operations.