09 Sep 23

How Does A Merchant Cash Advance Impact Your Credit Score

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Last Updated on: 10th September 2023, 03:36 am

How Does A Merchant Cash Advance Impact Your Credit Score?

Worried businessman

Merchant cash advances have become an increasingly popular financing option for small businesses. Unlike a traditional loan, merchant cash advances provide capital in exchange for a percentage of future credit card sales.

While merchant cash advances offer quick and easy funding, many business owners wonder – how will a merchant cash advance impact my credit score? Let’s take a closer look.

How Merchant Cash Advances Work

With a merchant cash advance (MCA), a funding provider gives you an upfront lump sum of capital in exchange for a fixed percentage of your future credit card sales. The MCA provider collects this percentage daily via automatic withdrawals from your credit card processor until the advance is paid back in full.

Unlike a term loan, there is no set payback period. The payback timeframe depends on your credit card volume. Busier merchants repay the advance faster.

MCAs and Credit Reporting

One key difference between merchant cash advances and traditional loans is credit reporting:

  • Loans are almost always reported to the credit bureaus and impact your credit score.
  • MCAs are generally not reported and do not directly affect your credit score.

This is because MCA providers operate outside the conventional lending system. They do not pull your business credit report or report any payment data to the bureaus.

Signing a contract

When MCAs Could Impact Credit

While MCAs themselves do not affect your credit, there are some scenarios where obtaining one could still influence your credit score:

  • Personal guarantee – If you personally guarantee the MCA, nonpayment could result in the provider reporting late payments to your personal credit report.
  • Collections – If you default on repaying the MCA, the provider may send the account to collections, damaging your personal or business credit score.
  • Other lending – Having an outstanding MCA obligation could negatively impact your ability to qualify for other types of business financing that do report to the credit bureaus.

So while MCAs do not directly alter your credit, downstream impacts like collections or reduced access to other credit could indirectly lower your score.

Using MCAs to Build Credit

Since most MCAs do not report your payment history, they will not help build your business credit profile like a loan would. However, there are couple potential strategies:

  • Use funds from the MCA to pay off existing debts that are reporting – this could improve your credit utilization ratio.
  • Find an MCA provider willing to report payments to the business credit bureaus – a rare but possible option.

But for most small business owners, MCAs should be used as a source of financing rather than a tool for proactively building credit.

Business owners celebrating

Using Personal Credit to Qualify for an MCA

While MCA providers do not report payment data to the credit bureaus, many will check your personal credit when reviewing an application. Here are some key points:

  • Minimum personal credit scores vary by provider, but often range from 500 to 600.
  • Your personal credit history helps assess overall repayment risk.
  • Good personal credit may help you negotiate better MCA terms.
  • Poor personal credit scores can disqualify you or result in higher MCA rates.

So maintaining a healthy personal credit profile remains important even when seeking merchant cash advance financing.

Tips for Minimizing Credit Impact

If you want to avoid credit damage when using merchant cash advances, here are some tips:

  • Only accept an amount you can confidently repay from projected credit card sales.
  • Avoid taking multiple MCAs that overwhelm your repayment ability.
  • Make payments on time to prevent collections reporting.
  • Notify providers early if you anticipate missing payments.
  • Have a plan to pay off MCAs quickly when possible.

Conservative use of merchant cash advances matched to your actual business needs will help prevent credit score damage down the road.

Key Takeaways

  • Merchant cash advances themselves do not directly impact your personal or business credit score.
  • But collections, personal guarantees, or reduced access to other credit could indirectly lower your score.
  • Good personal credit helps qualify for an MCA, even though MCAs don’t report.
  • Use MCAs conservatively and match to your ability to repay to avoid credit damage.

While credit impact is generally low, smart management of your MCA obligation remains important for any small business owner.

Helpful Resources


How Does A Merchant Cash Advance Impact Your Credit Score?

credit score concept image

With quick access to capital, merchant cash advances can help small businesses grow. But many wonder what happens to their credit score when getting an MCA. Unlike loans, MCAs do not follow standard reporting protocols. However, MCAs can still positively or negatively impact your business and personal credit scores in certain cases.

MCA Reporting To Business Credit Bureaus

One misconception is that MCA funders routinely report to major business credit bureaus like Experian, Equifax or Dun & Bradstreet. This is not true in most cases. The reporting practices of MCA funders are inconsistent.

Many smaller MCA providers do not report at all. Larger funders may report, but focus on just negative events like missed payments. Positive payment histories tend to go unreported.

Personal Credit Bureau Reporting

credit report example

It is also uncommon for MCA funders to report to personal credit bureaus like Experian, TransUnion and Equifax. This holds even if the small business owner personally guarantees the MCA.

Again, larger MCA companies are more likely to report defaults or collections issues to personal credit agencies. But routine positive reporting is rare.

How Non-Reporting Impacts Scores

Because MCAs infrequently appear on business or personal credit files, taking one out does little to immediately affect your scores upon approval. That neutrality can be beneficial.

However, making on-time MCA payments also will not boost your business or personal scores like a reported loan would.

Late Payments and Credit Scores

late payment warning sign

While positive MCA payment histories may not help scores, late or missed payments can damage both business and personal credit. Defaults or collections get reported much more consistently.

Even MCA non-reporting funders will alert credit bureaus about serious delinquencies. These black marks lower scores.

How Defaults Are Reported

With traditional loans, a default occurs after 90 days of non-payment. But MCA defaults work differently since there is no standard monthly repayment schedule.

Common MCA default triggers include 20-60 days without making the daily percentage deductions, violating card processing requirements, or bankruptcy.

Negotiating On Credit Reporting

business owner negotiating

Because credit bureau reporting practices vary so widely among MCA funders, you have some ability to negotiate terms upfront.

Try to bargain for:

  • No reporting of any kind
  • Only reporting severe delinquencies of 90+ days
  • Agreeing not to report if default is cured later

Get any negotiated terms in writing.

When Personal Credit Is Affected

Remember, MCA defaults can also impact your personal credit if you personally guarantee the advance. Even with no business reporting, personal score damage can occur.

Be proactive protecting both business and personal credit.

Fixing MCA Credit Damage

restoring credit concept

If an MCA default gets reported and hurts your scores, take these steps to start fixing the problems:

  • Bring the MCA current as quickly as possible.
  • Ask the funder to amend the credit file to show account in good standing.
  • Submit disputes to credit bureaus directly.
  • Add notes in credit files about the resolution.

With persistence, MCA-related credit damage can usually be overcome.

The Bottom Line

While not an automatic credit boost, merchant cash advances also will not hurt your business or personal credit scores when initially approved. But be vigilant about making daily payments to avoid score drops from reporting of delinquencies or defaults. With extra care, MCAs can provide funding without damaging credit.

Helpful Credit Resources