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How Does A Merchant Cash Advance Impact Your Credit Score?

Many small business owners find themselves in need of quick funding from time to time. When cash flow is tight, a merchant cash advance (MCA) can seem like an attractive option to get fast access to capital. But before taking out an MCA, it’s important to understand how it could impact your credit score.

What is a Merchant Cash Advance?

An MCA is a form of alternative business financing where a company receives an upfront lump sum payment in exchange for a percentage of future credit card or debit card sales. It’s not technically considered a loan, since there’s no set repayment schedule. Instead, the MCA provider takes a fixed percentage of daily or weekly credit card receipts until the advance has been repaid in full, plus fees.The advantage of an MCA is that you can get approved quickly and receive funds in your account within days, sometimes even faster than a standard small business loan. The downside is that MCAs are extremely expensive, with interest rates and fees equivalent to APRs over 100% in many cases.

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Does a Merchant Cash Advance Affect Your Personal Credit?

When you apply for an MCA, the provider will likely check your personal credit report and score to assess your creditworthiness. However, they are primarily concerned with your business’s financial health and sales revenue.

  • A hard credit inquiry from an MCA application can result in a small, temporary drop in your credit score. Too many inquiries in a short period can have a larger negative impact.
  • If you have poor personal credit, you may need to provide a personal guarantee, putting your personal assets at risk if you default.
  • The MCA itself does not get reported to the credit bureaus or show up on your personal credit report. So it does not directly impact your credit score as long as payments are made on time.

How MCAs Can Hurt Your Credit Score

While merchant cash advances aren’t directly reported to the credit bureaus, failing to repay an MCA can still hurt your credit in indirect ways:

  • Defaults or late payments – If you fall behind on MCA payments, the provider may send the account to collections or file a lawsuit to recoup the money owed. Having an account in collections or a judgment against you can severely damage your credit score.
  • Credit inquiries for more financing – Struggling to make MCA payments can tempt you to apply for additional financing, resulting in more hard inquiries on your credit report. Too many inquiries can lower your score.
  • Credit utilization – If you use credit cards or revolving lines of credit to help cover MCA payments, it will increase your credit utilization ratio. High utilization rates negatively impact your credit.
  • Personal guarantee – Providing a personal guarantee puts your personal assets at risk if you default. The MCA provider could seize collateral like your house, car, or bank accounts.

Tips to Avoid MCA Credit Score Damage

If you decide to move forward with an MCA, here are some tips to avoid hurting your credit:

  • Only work with reputable MCA providers and avoid predatory lenders. Carefully review the terms.
  • Make sure you can afford the daily or weekly payments based on your sales revenue. Don’t take more than you can realistically pay back.
  • Try to pay back the advance as quickly as possible to minimize interest fees. Don’t extend the term unless absolutely necessary.
  • Avoid taking out multiple MCAs at the same time since repayment can be difficult.
  • If you do fall behind, communicate with the MCA provider early and try to work out alternative repayment arrangements.
  • Consult a lawyer if the provider threatens collections or legal action so you understand your rights.
  • If you provide a personal guarantee, make sure you have a plan to cover payments if sales drop to avoid default.

Alternatives to Merchant Cash Advances

Because MCAs are so costly, you should consider other financing options first:

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  • Business credit cards – Cards like the Chase Ink Business cards offer 0% intro APR periods so you can pay back over time without interest.
  • Business lines of credit – Lines of credit provide revolving access to funds as needed and typically have lower rates than MCAs.
  • Invoice factoring – You can sell outstanding invoices to a factoring company to turn them into immediate cash.
  • Equipment financing – Financing options are available if you need funds to purchase equipment like vehicles or machinery.
  • SBA loans – The Small Business Administration guarantees loans made by lenders to qualifying businesses. Loan amounts and terms are flexible.
  • Crowdfunding – Platforms like Kickstarter or GoFundMe allow you to raise funds from customers and supporters.

The Bottom Line

Merchant cash advances provide fast access to capital but at an extremely high cost. While they don’t directly appear on your personal credit report, failing to repay an MCA can hurt your credit score and put your personal assets at risk. Before getting an MCA, be sure you can afford the payments and explore more affordable financing alternatives for your business. With careful planning, you can meet your financing needs without damaging your credit score.

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