The UCC 9-406 letter: why your customers were told to pay someone else

One morning a customer calls to say they received a letter from a company they have never heard of, telling them to send their payments for your invoices to that company instead of to you. The letter cites “UCC 9-406”. This guide explains what that section does, what it does not do, and why the letter is the clearest signal a funder can send about where it thinks your account stands.

What § 9-406 says

A merchant cash advance is written as a purchase of part of your future sales. In Article 9 terms, your right to be paid by a customer is an “account” and the customer is an “account debtor” (§ 9-102). When that right is sold or pledged, § 9-406(a) says the customer may keep paying you until it receives a notification, signed by you or by the funder, that the amount due has been assigned and that payment is to be made to the funder. After receiving it, the customer can discharge the debt only by paying the funder. Pay you instead, and the customer may have to pay twice.

That is why customers comply so quickly: the risk of the letter falls on them, not on you.

What your customers may ask for

• A letter that identifies what was assigned. Under § 9-406(b), a notification is ineffective if it does not reasonably identify the rights assigned.
• Reasonable proof of the assignment. Under § 9-406(c), the customer may request it, and until the funder provides it, the customer may keep paying you and still be discharged.
• Their own defenses. § 9-404 keeps the funder’s rights subject to the terms of the customer’s contract with you and to claims arising from it, so a dispute over your work is still a dispute the funder inherits.

None of this stops a valid letter. It gives your customer a short, lawful pause and a way to confirm the letter is genuine before changing where they send money.

What the letter signals

§ 9-607 lets a secured party notify account debtors to pay it directly “if so agreed, and in any event after default”. Most advance agreements agree to it in advance, but funders rarely use it while remittances are arriving, because it damages the business that is paying them. A letter to your customers usually means the funder has declared a default, or believes one is imminent, and has moved from waiting to enforcing. The same default can open the door to taking possession of collateral under § 9-609, to a demand under the personal promise most owners sign, and in some venues to a confession of judgment (New York has limited these for out-of-state owners under CPLR § 3218).

If you have several advances, expect the others to notice. Each agreement typically treats another funder’s enforcement as a default under its own terms.

The first week

• Get a copy of the letter from every customer who received one, and the list of who was contacted if the funder will provide it.
• Check the agreement. Find the default clause, the clause allowing notification of your customers, and any cure period. Note the date of the last remittance the funder actually drew.
• Do not instruct customers to ignore it. That exposes them to double payment and you to a claim. You may tell them, truthfully, that they are entitled to ask for proof of the assignment.
• Separate the facts from the pressure. Payments diverted to the funder still reduce what you owe it; keep your own ledger of every amount your customers redirect.
• Talk to a lawyer in your state before responding to the funder in writing. If the funder failed to follow Article 9, § 9-625 is where the remedies live, and only counsel can tell you whether it applies.

Under Levraq’s rule a 9-406 letter puts a business in at least the Strained tier on its own, whatever the ratio, and is one of the notices that makes a consultation worth considering. The free Debt Check records it alongside your remittance ratio, your stack and the public UCC filings for your business, and explains the options that remain open, including their known failure modes, so you can ask a professional better questions. Levraq is a diagnostic and referral service; it does not negotiate with funders and makes no promise about the result.