Security Interest: Meaning in a Merchant Cash Advance
A security interest is a legal right in property that backs up a payment obligation. If the business doesn't perform, the holder of the security interest has a claim to that property ahead of creditors who have no such right.
What does security interest mean?
The contract creates the security interest. The UCC-1 filing makes it visible to everyone else, which lawyers call perfecting it. A funder that bought your receivables will usually also take a security interest in them, and sometimes in other assets, so that it has a clear claim if the deal goes wrong or a court later decides the purchase was really a loan.
Why does security interest matter to your business?
The security interest decides what a funder can go after if there is a default, and who gets paid first when several creditors want the same assets. It is also the reason a new funder or bank asks about your existing filings. Two advances that both claim your receivables set up a conflict, which is one reason anti-stacking clauses exist.
What should you read closely?
- The collateral list. Receivables only, or inventory, equipment and bank accounts too?
- Whether the grant covers assets you acquire later.
- Whether the security interest ends when the advance is paid, and who files the termination.
How does a security interest end?
Paying the purchased amount in full ends the obligation the security interest backs. The public record doesn't clear itself, though. Ask the funder to file a UCC-3 termination and check that it went through.
Where will you see it?
In a clause usually titled "security interest" or "grant of security" in the merchant agreement. It lists the collateral and authorizes the funder to file a UCC-1. The guaranty often sits right next to it.
Which terms are related to security interest?
The full list is in the glossary. Owners ask about this in How do I find UCC filings on my business?.
A term on your offer you don't recognize?
Send us the line and we'll tell you what it means. Call 877-FUND-654 with any question. We call you back, usually the same business day, and we always talk with you before we shop your file.