Why would a merchant cash advance (“MCA”) funder contact your credit card processor? There are three reasons:
- to set up or confirm a “split” of a set percentage of your credit card sales;
- to redirect your credit card settlements after the funder claims you defaulted; or
- to collect on a judgment they obtained against you.
Processors are a target because credit card receivables are treated under Article 9 of the Uniform Commercial Code (“UCC”) as “accounts.” See UCC § 9-102(a)(2) (an account includes a right to payment “arising out of the use of a credit or charge card”). See UCC § 9-109(a)(3) (providing that Article 9 applies to “a sale of accounts”).
How Does “Split Funding” Work as Compared to ACH Debits?
Some MCA deals are structured as split funding, which means your payment processor holds back a portion of your card sales and sends it to your funding source. Rather than withdrawing a set amount from your bank account daily as with an ACH agreement, funders take their funding “directly from the processor that clears and settles the credit card payment.” According to Nav, the holdback is “usually between 10% and 20% of your daily receipts.”
If your deal is structured this way, the MCA funder may contact your processor on day one to set up the split. Contracts often lock this in. For example, one of Arin Funding’s MCA contracts filed with the U.S. Securities and Exchange Commission (“SEC”) requires the recipient to “use one (and only one) credit card processor, which shall be preapproved by the Purchaser.” Because split funding is a percentage of sales, it shrinks on bad days, whereas ACH deals rely on a “reconciliation clause.”
Since September 1, 2025, MCA funders on Texas deals under $1,000,000 may not automatically debit a recipient’s deposit account unless the MCA funder has taken a first priority, perfected security interest in the account. See Tex. Fin. Code § 398.056. The Texas law does not mention credit card processor splits, so it may push Texas funders toward them. Vermont is following the same model. See H.648 (Vt. 2026) (effective July 1, 2027).
Can MCA Funders Contact Your Credit Card Processor to Redirect Your Credit Card Sales?
MCA funders can notify your credit card processor to start paying them if the contract allows it or if you have defaulted on the MCA deal. See UCC § 9-607(a)(1) (a secured party may notify a person obligated on collateral to pay it “if so agreed, and in any event after default”). Many MCA contracts include this right. For example, Arin Funding’s April 2025 contract, provides that, upon an event of default, ARIN may “notify each Merchant’s credit card and/or check processor and account debtor(s) of the sale of Receivables hereunder.” Id. It also grants ARIN an “irrevocable power-of-attorney” to direct even a “new or additional” processor to pay ARIN. Id.
Here’s how this works if you average $4,000 in daily credit card sales and pay 15% to the funder.
| Situation | MCA Funder Gets | Your Credit Card Sales Settle to You |
|---|
| 15% of your credit card sales | $600 | $3,400 |
| Funder notifies processor to send all receivables to them | $4,000 | $0 |
| Processor holds funds due to dispute | $0 | $0 |
Your processor is right to question whether the MCA funder is entitled to all of your receivables if it only purchased a percentage of them. The notice to the credit card processor should not be effective “if it does not reasonably identify the rights assigned.” UCC § 9-406(b)(1). For notices to customers, see our guide on whether MCA funders can contact your customers.
Why did your processor freeze payouts when the funder hasn't sued you?
It’s likely your processor is protecting itself pursuant to its agreement with you. Square’s payment terms expressly permit it to “defer payout or restrict access to your Proceeds, temporarily or indefinitely,” to, among other things, “resolve any pending dispute,” and its reserve can cover obligations to creditors “including levies, liens, or garnishments.” Likewise, Stripe’s agreement defines a reserve as funds the company “holds and controls” against your potential liabilities.
After judgment, New York law permits a judgment creditor to enforce its judgment against “any person who it is shown is or will become indebted to the judgment debtor.” See CPLR 5227. And one firm working on the funder side has published that it uses information subpoenas “directed at fintech platforms and payment processors.” A levy or restraint is legal process, which you answer in court or through negotiation with the funder.
What should you do this week if your processor is holding funds?
- Ask your processor for a copy of the notice it received from the funder;
- Find the clause in your MCA that the funder is enforcing and the default section;
- Remind your processor that it can rely on UCC 9-406(c), which lets it demand “reasonable proof that the assignment has been made” and keep paying you until the funder complies;
- Check whether the notice is only supposed to cover the percentage you sold;
- If the MCA has a reconciliation clause, ask for one in writing; and
- Document payroll and vendor payments you can’t make.
If the funder is collecting from account debtors with recourse, it must act “in a commercially reasonable manner.” See UCC 9-607(c). You may also consider cease and desist letters or an injunction to stop the notice of assignment. See How to Make Your Merchant Cash Advance Funder Stop Calling Your Customers!
Frequently Asked Questions
Does my processor have to follow the funder’s notice?
Your processor can rely on UCC 9-406(c) until the funder complies with it (it may keep paying you until the funder furnishes “reasonable proof that the assignment has been made”) and also 9-406(b)(1) if the notice doesn’t “reasonably identify the rights assigned.”
Can’t I just switch processors?
Likely not. Many MCA agreements include a provision prohibiting you from changing processors or adding new terminals without the funder’s written consent (see, e.g., April 2025 ARIN Agreement). Some may even deem it an event of default and accelerate the balance. See, e.g., October 2024 Arin Agreement. Review your agreement to see whether it would be.
Is a processor hold the same as the funder freezing my account?
The funder can’t freeze your account just by sending a letter to your processor; it’s likely your processor acting pursuant to its own agreement with you. Your bank account can generally only be frozen with legal process.
If I settle with the funder, won’t it withdraw the notice with the processor?
Not unless you make it a term of the settlement. Include a term requiring the funder to withdraw its notice with the processor in writing by a certain date. The processor has no reason to release your funds until the funder tells it to.