If you’re a small business owner, you may have come across one financing option known as a merchant cash advance (MCA). One of the reasons an MCA can be attractive is the fact that you can qualify for one even if your personal or business credit isn’t in great shape. However, you might wonder if taking out an MCA can impact your credit — especially if you don’t pay on time or even default. So how does a merchant cash advance impact your credit score? Read on to find out.
How Is Your Personal Credit Impacted by an MCA?
Good credit is important for individuals and business owners. It helps you secure low interest rates and favorable terms as a borrower. If you have bad credit, you will pay higher interest rates or may not be approved.
To understand how a merchant cash advance impacts your credit, it’s helpful to know how your FICO score (the one used most often by lenders) is calculated:
Payment history (35%)
The most important credit score factor is your payment history. Paying your bills in full and on time will help you develop good credit in the long run. On the other hand, missing payments can hurt your score considerably, especially if they lead to collections accounts, foreclosure, or bankruptcy.
Amounts owed (30%)
Another important credit score factor is how much debt you owe compared to the total amount of credit extended to you. Keeping your debt balances low will help your score improve. Revolving credit (such as credit cards and other lines of credit) also has a bigger impact than installment loans.
Credit history (15%)
Lenders like to see that you’ve been responsibly using credit for a while. The longer your credit history, the better.
Credit mix (10%)
It’s also important to show that you have experience managing different types of credit. A mix of revolving credit and loans that are in good standing will help boost your score.
New credit (10%)
Finally, taking out too many loans or credit cards quickly can be a red flag to lenders. Every time you apply for credit, a copy of your credit report is pulled. This is a “hard credit inquiry,” and too many can damage your score. Space out the time between credit applications to keep your credit score in good shape.
How Does a Merchant Cash Advance Impact Your Credit Score?
Since an MCA lets you borrow an advance amount to cover business expenses, you might be concerned about how it could affect your personal or business credit score.
Merchant cash advances aren’t loans. They are considered alternative business financing and are an upfront advance on your future credit card and debit card sales (or other types of revenue). So, they aren’t regulated in the same way that small business loans and other term loans are. That also means they don’t impact your credit in the same way as traditional bank loans.
MCAs often target startups and business owners without great credit or needing quick cash. Instead of relying on your personal or business credit profile to determine whether you should be approved, merchant cash advance companies focus on your business’s projected revenue or future receivables. They will examine eligibility factors such as your daily sales, annual income, and projected future sales. So even if you have bad credit, you can secure a merchant cash advance with relatively favorable terms if you have a high enough sales volume to meet the payment schedule for the MCA.
That’s not to say your credit score is irrelevant when applying for an MCA. Many merchant cash advance providers evaluate creditworthiness and have a minimum credit score as part of the approval process. And if you don’t have great credit, you might be required to sign a personal guarantee (more on that later). Your credit score is just not as important as your business revenue and outlook for getting an MCA.
Reporting to Credit Bureaus
MCA repayment activity is generally not reported to the credit bureaus. That can be a good or bad thing, depending on your situation. If you’ve been making all of your payments on time, you won’t get any credit toward a positive payment history. On the other hand, if you’re delinquent on payments, your credit score should remain unaffected—for the time being.
That said, taking out an MCA can affect your credit and personal assets.
Hard Credit Inquiries
The MCA provider could pull your credit report when you go through the MCA application process. This lets them know what liability you might hold and whether you’re reliable when paying back debt. Every time an MCA company or anyone making an inquiry on your credit report runs your credit, you’ll have another hard inquiry on your credit report.
Generally, one or two inquiries won’t significantly affect your score. However, several within a short period could cause your credit score to drop. Hard credit inquiries stay on your credit report for two years, and their impact lessens over time.
Personal Guarantee
If your credit score isn’t the best, the MCA provider may require you to sign a personal guarantee. This means your assets (such as real estate, bank accounts, investments, etc.) are collateral for the advance. If you default on your MCA, your personal assets, including your home, bank accounts, or other assets, could be at risk. Poor credit may mean a higher factor rate, which could decrease your cash flow and make it tougher to afford those daily or weekly payments.
Default and Collections
Finally, if you do default on your MCA, it could be sent to a collections department, third-party debt collections agency, or collection law firm. Unpaid debt collection accounts usually get reported to the major credit bureaus. A collection account on your credit report can seriously damage your score. But again, you might not see the MCA reported, even if delinquent.
Additionally, defaulting on your MCA is usually considered a breach of contract and repayment terms. In this case, the MCA provider may file a lawsuit for the money owed. The good news is if they obtain a judgment against you, it won’t go on your credit report. Civil judgments are no longer reported to the credit bureaus. Now, bankruptcy is the only public record information noted on credit reports.
However, a judgment means that the MCA company can then try to freeze your bank accounts and seize your assets. Even if this isn’t noted on your credit report, it can negatively impact your finances and impede your business operations.
How Tayne Law Can Help
It’s certainly possible to handle MCA debt on your own. But it is stressful and you might not be equipped to make the best decisions about handling the MCA so it can be resolved. If you’re in danger of defaulting or even facing a lawsuit, it’s important to have an experienced legal team by your side. Working with an attorney who understands the ins and outs of MCA debt and the process of resolving delinquent MCA payments can save you time and stress. You’ll no longer have to spend your days fielding calls from solicitors, creditors, brokers, and the MCA company itself; your attorney can take over while you focus on operating your business and getting things back in order.
Tayne Law Group is a New York-based business debt relief firm focusing on resolving MCA debt. We’ve been helping clients resolve merchant cash advance and other types of business debt for more than two decades. Call us if you’re struggling with MCA payments, have been sued by an MCA company, or need an MCA attorney. We can devise a plan that lets you keep your credit intact and your business running while getting the MCA payments under control.
Not sure if you’re ready to hire a lawyer? We offer a no-obligation phone consultation so you can learn about our process and potential solutions when dealing with MCA debt. Give us a call at (866) 890-7337 or fill out our short contact form. We never share/sell your information and all discussions are confidential.
