Merchant Cash Advance Subordination Agreement: How to Get Your MCA Funder Out of First Position So a Cheaper Loan Can Close

A business owner finds a lender willing to replace expensive merchant cash advance debt with a lower-cost term loan, equipment line, or receivables facility. The rate is better, the payment is monthly instead of daily, and the numbers finally work. Then underwriting pulls a UCC search, finds the MCA funder’s blanket lien sitting in first position, and the deal stops.

The document that usually unlocks that deal is a subordination agreement: a signed contract in which the MCA funder agrees to move behind the new lender on some or all of the business’s collateral. This guide explains how MCA lien subordination works, why a funder facing a struggling merchant often has more to gain by agreeing than by refusing, and why business owners are usually better served having an attorney make the request.

CredibleLaw is a national legal resource and attorney referral network, not a law firm. We connect business owners with independent attorneys who handle MCA defense, UCC lien disputes, and business debt restructuring. Nothing on this page is legal advice for your situation.

Subordination vs. Subrogation: Which One Applies to an MCA Lien?

The two words are often confused, and many business owners search for “MCA subrogation” when they mean subordination.

Subordination is a voluntary reordering of priority. The MCA funder keeps its lien and its right to be repaid, but agrees in writing that a new lender gets paid first from the agreed collateral. This is what a refinancing lender asks for.

Subrogation is different. It means one party steps into another creditor’s shoes after paying that creditor’s claim, the way an insurer that pays a loss takes over the insured’s right to sue. A refinancing lender that pays off an MCA may in some situations claim the old lien position through subrogation, but that is a separate legal doctrine and not the same as asking the funder to step back.

For a business trying to close a cheaper loan while an MCA balance remains outstanding, subordination is almost always the tool that matters.

Why an MCA’s First-Position UCC Lien Blocks Refinancing

Most MCA agreements include a security agreement and are followed by a UCC-1 financing statement filed with the secretary of state. The filing typically describes the collateral broadly: all accounts, receivables, deposit accounts, inventory, equipment, and general intangibles, now owned or later acquired. That is a blanket lien.

Under UCC § 9-322, priority among competing secured creditors generally goes to whoever filed or perfected first. Banks, equipment lenders, asset-based lenders, and factors all run a UCC search early in underwriting. When an MCA filing covers the same collateral the new lender needs, that lender would sit in second position, and most will not fund there. The new lender then asks for one of three things before closing: a payoff with a UCC-3 termination, a UCC-3 amendment releasing specific collateral, or a signed subordination agreement.

For background on how these filings work and when they can be challenged, see CredibleLaw’s guides on how to remove a UCC lien and MCA liens on accounts receivable.

What an MCA Subordination Agreement Actually Does

UCC § 9-339 is one sentence long: Article 9 does not prevent a creditor entitled to priority from subordinating that priority by agreement. Every state has adopted it. A subordination agreement uses that permission to rewrite the default first-to-file order between two specific creditors.

In practice, an MCA subordination agreement usually covers:

• Which collateral is subordinated. It can be everything, or only a class such as equipment being financed, or receivables pledged to a new line of credit.
• The cap. The funder may subordinate only up to a stated dollar amount of the new lender’s debt.
• Payment rights. Whether the MCA funder can keep collecting, at what amount, and what happens if the merchant defaults on the senior loan.
• Standstill terms. Limits on the funder’s ability to sue, levy, or enforce while the senior debt is outstanding.
• Filing mechanics. Whether a UCC-3 amendment will be filed so the public record reflects the new priority.

The agreement is between creditors, but the business owner’s obligations and risks are shaped by every one of those terms.

Why Subordinating Is Often the MCA Funder’s Best Option

A funder’s first instinct is usually to refuse. First position feels like leverage. But when the business is struggling under daily or weekly debits and a cheaper loan is the realistic way to stabilize it, the funder is choosing between a few outcomes, and refusal is often the worst one for the funder itself.

A refinanced business can actually pay

A company that replaces high-cost debits with an affordable monthly payment has more operating cash, which is the cash that ultimately pays the remaining MCA balance. A funder that subordinates is betting on a healthier merchant. A funder that refuses is betting that a merchant already under strain will keep making payments that may not be sustainable.

Refusal can push the business toward Chapter 11

If the cheaper financing dies and the debits continue, many owners end up consulting a bankruptcy attorney. A Chapter 11 or Subchapter V filing changes the funder’s position in several ways:

• The ACH stream stops. The automatic stay under 11 U.S.C. § 362 halts collection activity, including withdrawals, as soon as the petition is filed.
• Future receivables are generally out of reach. 11 U.S.C. § 552(a) provides that property the debtor acquires after filing is not subject to a lien from a pre-bankruptcy security agreement, with a limited exception for proceeds of existing collateral. MCA funders depend on receivables that do not exist yet, and courts have found that receivables generated after the filing belong to the bankruptcy estate rather than the funder.
• Recharacterization risk rises. Bankruptcy courts examine whether an MCA is a true sale of receivables or a disguised loan, weighing factors such as whether reconciliation was genuinely available, whether there is a finite term, and whether the funder has recourse if the merchant files. A finding that the deal was a loan can expose it to usury arguments under the applicable state law.
• Plans can restructure secured debt. Chapter 11 can stretch repayment, and a secured claim is generally limited to the value of the collateral actually securing it.
• Delay and cost. The funder pays its own lawyers to monitor the case, object, and negotiate, often for months.

Subchapter V, the streamlined Chapter 11 track for smaller businesses, is available to debtors under a debt limit of $3,424,000 as of January 1, 2026. Many MCA-burdened businesses fall under it. See CredibleLaw’s overview of MCA bankruptcy options.

How the choices compare from the funder’s side

Every case is different, and none of these outcomes is guaranteed. The point is that a funder’s attorneys usually understand this math well, which is why a carefully framed request from the merchant’s attorney can change the conversation. Payoff, Subordination, or Conversion: Three Ways to Clear the Path

Where an MCA balance is disputed, settlement may come first. See MCA settlement options.

The SBA Angle in 2026: What Changed on October 1

Under SBA SOP 50 10 8, effective June 1, 2025, merchant cash advances and factoring agreements were removed from the debts eligible for refinancing with SBA 7(a) and 504 loan proceeds. That closed what had been a common exit from MCA debt.

SOP 50 10 8.1, effective for applications that receive an SBA loan number on or after October 1, 2026, adds a conditional path. As reported in coverage of the new SOP, an active sales-based repayment agreement still cannot simply be refinanced with SBA proceeds. The agreement must first be converted into a term loan, that loan must amortize for at least 24 months, and the business cannot enter new sales-based repayment agreements after the conversion. The current SOP is published on the SBA’s lender SOP page, and an SBA lender should confirm how it applies to any specific file.

Two practical consequences follow:

• Non-SBA financing is still the near-term route. Bank lines, equipment financing, and asset-based facilities can close now, and that is where subordination agreements do the most work.
• Conversion now has added value. Negotiating an MCA into a properly documented term loan may start the clock on future SBA eligibility. How that conversion is papered matters, and it is the kind of detail an attorney should handle.

Why a Business Owner Should Have an Attorney Handle the Subordination Request

An owner can call the funder directly. Many do, and many reach a sales representative or collections agent who has no authority to subordinate anything. Decisions on lien priority are typically made by the funder’s legal or underwriting department. An attorney changes several things about that process.

The request reaches the right people and is taken seriously

Attorney-to-attorney communication tends to reach decision-makers faster. It also signals that the merchant understands its options, including bankruptcy, which is often what prompts a funder to weigh subordination rather than reflexively refusing.

The attorney can identify leverage in the MCA contract itself

Many MCA agreements contain terms that can be challenged: reconciliation provisions the funder did not honor, fixed payments that look like loan repayment, confession-of-judgment clauses that may be unenforceable in some states, or stacking violations. Each of these can affect how much leverage the funder really has. See common MCA legal defenses.

The draft gets reviewed before anyone signs

Funder-drafted subordination agreements can include terms that hurt the business later, such as:

• A cross-default clause that lets the funder declare default if anything goes wrong on the new loan
• Payment terms that preserve the full daily debit, defeating the purpose of refinancing
• New or expanded personal guaranties, or reaffirmation of a confession of judgment
• Fees, “consent charges,” or balance increases buried in the agreement
• No obligation to file a UCC-3 amendment, leaving the public record unchanged

Stacked positions are coordinated, not handled one at a time

A business with three or four MCAs typically has several UCC filings. The new lender needs all of them addressed. An attorney can sequence payoffs, subordinations, and terminations so one funder’s refusal does not unravel the rest. If stacking is already part of the problem, see MCA stacking lawsuit defense.

The owner avoids statements that can be used later

Calls with collections staff are often documented. Admissions about the business’s finances, promises of payment, or statements about other creditors can surface in later litigation. Routing communication through counsel keeps the record controlled.

How the Subordination Process Typically Works

1. Pull the UCC record. Search the secretary of state filings for every financing statement against the business and identify which ones cover the collateral the new lender needs.
2. Get the new lender’s requirements in writing. Most lenders have a standard subordination form or specific terms they require.
3. Review each MCA contract. The attorney looks at the security agreement, reconciliation terms, guaranties, and any anti-stacking or default provisions.
4. Establish the true balance. Payment history from bank statements is compared against the funder’s figures.
5. Make the request. Counsel presents the refinance, explains the business case for the funder, and proposes terms.
6. Negotiate the document. Collateral scope, caps, payment terms, standstill, and filing obligations are worked out among the merchant, funder, and new lender.
7. Close and file. The agreement is signed, the new loan funds, and any UCC-3 amendment or termination is filed and confirmed on the public record.

What to Gather Before Speaking With an Attorney

• Every MCA agreement, including addenda and any renewal or “refinance” contracts
• Bank statements showing all debits to each funder
• Any UCC search results or lien notices you have received
• The new lender’s term sheet or approval letter and its subordination requirements
• Default notices, demand letters, or court papers, if any
• Records of any reconciliation requests you made and the funder’s responses

Frequently Asked Questions

What is an MCA subordination agreement?

It is a written agreement in which a merchant cash advance funder agrees that a new lender will have priority over the funder’s UCC lien on some or all of a business’s collateral. The funder keeps its lien and its claim but moves into a junior position.

Is subordination the same as subrogation?

No. Subordination is a creditor voluntarily giving up its priority. Subrogation is a party stepping into another creditor’s rights after paying that creditor. A business refinancing around an MCA lien almost always needs subordination.

Can an MCA funder be forced to subordinate?

Generally, no. Subordination is voluntary under UCC § 9-339. What changes a funder’s decision is usually leverage: the strength of the merchant’s contract defenses, the realistic alternative of bankruptcy, and a clear explanation of why a refinanced business is more likely to pay.

Will the new lender accept a second-position MCA lien?

Most banks, equipment lenders, and asset-based lenders require first position on the collateral they finance. Some will close with an MCA lien in place if it is properly subordinated on that collateral. Each lender sets its own requirements.

Can I use an SBA loan to pay off my merchant cash advance?

Not directly. SBA rules have barred refinancing MCAs since June 1, 2025. SOP 50 10 8.1, effective October 1, 2026, allows a path only after the MCA is converted to a term loan that has amortized for at least 24 months, with no new sales-based agreements afterward. Confirm the current rules with an SBA lender.

What is the difference between a UCC-3 termination and a subordination?

A UCC-3 termination removes the funder’s financing statement from the record, usually after payoff. A subordination leaves the lien in place but reorders priority. A UCC-3 amendment can also be filed to release specific collateral or reflect a subordination.

Does subordination reduce what I owe the MCA funder?

Not by itself. It changes the order of repayment, not the balance. Balance reductions come from negotiation, settlement, or successful defenses, which an attorney may pursue at the same time.

What happens to the MCA lien if my business files Chapter 11?

The automatic stay stops collection, and under 11 U.S.C. § 552(a) a pre-bankruptcy lien generally does not attach to property acquired after filing, subject to an exception for proceeds of existing collateral. The court may also be asked to decide whether the MCA was really a loan. Outcomes depend heavily on the facts and the jurisdiction.

Related reading: MCA UCC lien removal · MCA defense attorney · MCA bankruptcy options

CredibleLaw is a legal resource and attorney referral network, not a law firm, and does not provide legal advice. Use of this site or contact with CredibleLaw does not create an attorney-client relationship. Attorneys in our network are independent. Laws, SBA policies, and bankruptcy thresholds change; information on this page was reviewed as of October 2026 and may not reflect later developments. Past results do not guarantee future outcomes.