A Merchant Cash Advance (MCA) can be an attractive option for businesses in need of quick funding. However, one of the most common questions business owners ask is: How does a Merchant Cash Advance affect my credit score? Understanding the relationship between MCAs and credit scores is crucial before deciding whether this type of financing is right for your business. This article explores the impact of MCAs on credit scores, the factors to consider, and alternative options to protect your financial standing.
Understanding How Merchant Cash Advances Work
An MCA is not a traditional loan; instead, it is an advance based on a business’s future revenue. The lender provides a lump sum of cash upfront in exchange for a percentage of daily credit card transactions or bank deposits until the advance is repaid. Because MCAs are based on revenue, approval is generally easier to obtain than with traditional bank loans, and credit scores may not play a significant role in eligibility.
How an MCA Can Affect Your Credit Score
Although MCAs do not typically require a high personal or business credit score for approval, they can still have various effects on your creditworthiness. Here’s how:
- Soft vs. Hard Credit Inquiries
- Many MCA providers perform a soft credit check during the approval process, which does not impact your credit score.
- Some lenders may conduct a hard inquiry, which can temporarily lower your credit score by a few points.
- Business Debt Reporting
- MCAs generally do not report to major business credit bureaus like Dun & Bradstreet, Experian, or Equifax, meaning they won’t directly improve your business credit score through on-time payments.
- If you default, some MCA providers may report missed payments to credit bureaus, which can negatively impact your credit history.
- Increased Debt-to-Income Ratio
- While MCAs do not function like traditional loans, their high repayment costs can strain business cash flow.
- If you take out multiple advances or struggle with repayment, lenders assessing future creditworthiness may view your business as high-risk.
- Legal Action and Credit Score Damage
- If an MCA provider secures a judgment against your business for non-payment, it could appear on your credit report, significantly damaging your score.
- Certain MCA agreements include personal guarantees, meaning defaulting on payments could impact your personal credit score as well.
Steps to Minimize Credit Score Risks with an MCA
If you are considering an MCA but want to protect your credit score, follow these best practices:
- Choose Reputable Lenders: Work with MCA providers that conduct only soft credit pulls and do not aggressively report to credit bureaus.
- Understand Repayment Terms: Ensure your business can handle the daily or weekly deductions without harming cash flow.
- Limit the Use of MCAs: Avoid stacking multiple cash advances at once, as excessive borrowing can make future financing difficult.
- Negotiate Better Terms: Some MCA providers may offer more favorable repayment structures based on your revenue consistency.
- Explore Alternative Financing: Consider business lines of credit, SBA loans, or invoice factoring for potentially lower-cost financing options.
Alternatives to MCAs for Credit-Conscious Borrowers
If maintaining or improving your credit score is a priority, there are alternative financing options that might be more suitable:
- Business Lines of Credit: These offer flexibility and report positive payment history to credit bureaus.
- Small Business Loans: Traditional loans typically have lower interest rates and help build business credit over time.
- Invoice Financing: This allows businesses to access cash based on outstanding invoices without significantly impacting credit.
A Merchant Cash Advance can provide quick access to capital, but it is essential to understand how it may affect your credit score. While MCAs do not typically contribute to business credit growth, defaults, excessive borrowing, or legal judgments can harm both business and personal credit profiles. By carefully considering your repayment ability and exploring alternative financing options, you can secure funding while safeguarding your financial health.