My funder is contacting my customers. Can they do that?

You find out when a customer forwards you the letter. It’s on legal letterhead, it says your company has assigned its receivables, and it instructs them to remit payment to the funder going forward. Your best account calls to ask what is going on. Some accounts stop paying anybody at all, because nobody wants to pay the wrong party twice.

This is a notification under Article 9 of the Uniform Commercial Code, section 9-406, and yes, a secured party with a valid interest in your accounts can do it.

Why it’s so effective

Because the risk lands on your customer, not on you or the funder. Once an account debtor receives a valid notification, paying you instead of the secured party can leave them liable to the secured party for the same money. Faced with that, a rational accounts-payable department pays the funder or pays nobody. Either outcome is fatal to your cash flow.

For a trucking company whose revenue comes through a handful of brokers, or a subcontractor billing two general contractors, a single round of notices can end the business in weeks. The funder doesn’t need to be right about the default. It just needs to be first.

What actually gets challenged

These notices are frequently defective, and the defects matter because a defective notification doesn’t carry the legal effect that makes your customers comply.

• Whether the UCC-1 was filed against the correct legal entity name. Filings against a d/b/a, a misspelling, or a dissolved predecessor entity are common and consequential.
• Whether the security interest actually covers the accounts in question, or only credit card receipts, or only specific contracts.
• Whether a default has actually occurred under the agreement, particularly where a reconciliation provision means the funder was overcollecting in the first place.
• Whether the notification itself meets the statutory requirements as to content and authentication.
• Priority, when multiple funders have filed. A junior secured party sending notices as though it were senior is overreaching, and pointing that out to its counsel produces results.

What to do the day it happens

• Don’t call your customer and tell them to ignore the letter. You may be creating a problem for them and you won’t sound credible.
• Get counsel to send a formal response to the funder and, where appropriate, to the account debtor, stating your position and providing cover for the customer to keep paying you.
• Pull every UCC filing against your entity from your Secretary of State. Check names, dates, collateral descriptions, and order of filing.
• Assume this is now a legal matter, not a negotiation matter, and staff it accordingly. A negotiation-only relief company can’t help you here, and some will simply go quiet.

The leverage nobody mentions

Here’s the part that cuts your way. A funder that sends notices on a defective filing, or that misstates its position to your customers, has taken on real exposure of its own. Tortious interference and lender-liability theories exist, and funder counsel is aware of them.

That’s why these situations often resolve quickly once a competent response lands. The funder wanted a scared merchant. What it got was an adversary who read the filing, found the entity-name error, and put its exposure in writing. Settlements after that letter look very different from settlements before it.