When a business owner is behind on a merchant cash advance, the first question we hear is: “Will it follow me?” Or, more accurately: “Will it show up on my credit report?” The simple answer is no, it won’t show up on a business credit report. But it might show up on your personal credit report. That’s usually a surprise. First, the good news. An MCA advance in default will not appear on the credit report of your business. The MCA funder will not report the event to the business credit bureau. Now the bad news. A default can be reported to one or more of the personal credit reporting agencies. Which means it can affect your personal credit score.
A Merchant Cash Advance Is Not a Loan
To see why, it’s important to know how the advance works. With a merchant cash advance, instead of a fixed monthly loan repayment, you repay the advance over time with a percentage of your debit and credit card sales, plus a fee, or the funder takes fixed withdrawals straight out of your business bank account. A merchant cash advance is not a loan. A merchant cash advance company typically looks at your card receipts to determine how much to offer you. Your personal credit score doesn’t come into the equation, so owners with low FICO scores can qualify for an MCA. The higher the factor rate, the higher your cost.
Because an MCA isn’t a loan, it isn’t reported to the business credit bureaus. On one hand, this prevents the MCA’s negative effects from being recorded in a business credit report. It also means you can’t establish a positive repayment history that might result in a solid business credit rating. You won’t see a change in your Dun & Bradstreet, Experian or Equifax score from a good, timely payment to your MCA company. And a future lender won’t use the payment history from an MCA when they consider whether to give your business a loan.
If your personal credit score suffers, it can lead to additional problems. If you’re working to improve your personal credit, a default will work against that effort. In addition, your personal credit may impact your ability to secure a business loan, so a default could compromise the business’s future, too. If your personal credit report shows a default from a merchant cash advance, you may have a hard time qualifying for a business loan. So a default that never touches your business credit report can still make it harder to get your next loan, too.
Fees Tend to Be High
Then there is the cost. Factor rates tend to hover between 1.15 and 1.5. Because merchant cash advances aren’t a loan, they do not fall under state usury laws, so there is no legal limit on how much a funder can charge you. In a way, an MCA is like a business version of a payday loan. The catch with an MCA is that fees tend to be high - and there’s no ceiling. Because a factor rate is not an interest rate, many business owners don’t realize what they’ve gotten into until they’ve already signed the paperwork.
If your business pays a percentage of your card sales as repayment, then your repayments will vary up and down as your sales do, day-to-day or week-to-week. On the other hand, when you have fixed payments from your bank account, you know exactly how long it will take to pay off the MCA. Oddly, the faster you pay off your MCA, the higher the APR, but the total paid will be roughly the same as when you pay slowly. The difference is that the slow payer will have an MCA hanging over their head for years.
When you take an MCA, there’s often a minimum that you’re required to pay, even if you have no money in your merchant account. Think of the situations where this can happen: a business has a bad year. They lose working capital. Then they have to pay back an MCA with their own personal money. That is how a business debt becomes a personal one. Here’s how it often goes: a business owner takes out a merchant cash advance and waits for their customers to start paying with credit cards. As the money comes in, they immediately plow their profits back into paying the MCA. They never accumulate enough money to change the business, just enough to keep paying the MCA. But how can one break the cycle?
Business Debt Settlement
So if you have a delinquent MCA and you haven’t taken any steps yet, don’t wait any longer to take action. We’re Delancey Street, a business debt settlement company. Our advisors negotiate with MCA funders and lenders to resolve debts for less than the amount owed. We don’t sell you another loan. The initial consultation is free and confidential, and if there is a less expensive option or if bankruptcy is the better choice, we let you know on that first call. Delancey Street is not a law firm, and so when litigation or bankruptcy is the right choice for an owner, we refer the owner to a trusted, independent lawyer, and an attorney-client relationship is created between the owner and that lawyer. We handle MCA debt, including stacked advances.
After paying off an MCA, a business can look at other financing options for its next capital need. Invoice factoring can be a good option for businesses that have accounts receivables. Taking on a guarantor or credit partner with better personal credit can give access to a traditional bank loan or SBA loan. Or the company can borrow from a business line of credit or a microloan. It also makes sense for any business to work on building business credit.
And does a Merchant Cash Advance default show up on your personal credit? It may. It won’t appear on your business credit report, but it could impact your personal report, derail any attempt you might have made to rebuild your credit and make any future loan for your business even more difficult to obtain. If you find yourself falling behind, don’t wait.
