5 Ways MCA Judgments Affect Your Business Credit (and How Long)

Merchant cash advances (MCAs) are a form of financing that small businesses often use when they can't obtain traditional loans. They are risky for merchants and for MCA companies. They are also incredibly expensive. One of the reasons why MCAs are so expensive is that they are structured as sales of businesses' future receivables, rather than as loans, and MCA companies demand interest rates commensurate with the risk of these receivables failing to materialize.

Under most MCA agreements, merchants are required to remit a daily portion of their receivables to their MCA company. This can quickly create problems if a merchant is struggling to cover its other obligations or otherwise does not have a steady stream of incoming revenue. Defaulting on an MCA has immediate consequences. One of these consequences is the entry of a judgment in court, and these MCA judgments can have far-reaching implications.

What is an MCA judgment? Simply stated, a judgment is a judicial order declaring that a debt is due. Under many MCA agreements, merchants sign what is known as a "confession of judgment," which allows the MCA company to enter the confession of judgment in court without initiating a lawsuit and going to trial.

With a confession of judgment in place, once the MCA company determines that the merchant is in default, the MCA company can immediately initiate collections proceedings and start pulling the merchant's money from its bank accounts. However, while judgments are extremely dangerous for business owners who need relief from their MCAs, and while MCA judgments have serious negative consequences for businesses' creditworthiness, a confession of judgment is not the same as a judgment in court. For this reason, even after a judgment has been entered in court, merchants will often be able to challenge these judgments successfully.

MCA judgments have negative implications for a business's creditworthiness. Once a judgment is entered, it shows up on credit reporting agencies' records. This can, in turn, increase borrowing costs or even prevent businesses from securing the financing they need. While most companies that accept merchant cash advances do so to raise immediate working capital, failing to pay off an MCA can make securing financing more difficult in the future.

Judgments Can Significantly Affect the Company's D&B PAYDEX Score

Your company's D&B PAYDEX Score provides other businesses with a general overview of your company's overall creditworthiness. The higher your company's score, the more creditworthy other companies consider it to be. On the contrary, the lower your company's D&B PAYDEX Score, the less likely it will be that other companies or banks will lend to it. Judgments will cause your company's D&B PAYDEX Score to take a significant hit, and judgments can lower the company's creditworthiness with other bureaus and agencies as well.

Higher Borrowing Costs and Denied Loan Applications

A judgment for a defaulted merchant cash advance can show up on various credit bureaus' and agencies' reports. If you apply for a business loan or business credit card in the future, any lender who runs your company's credit is going to see that you previously defaulted. Not only can this cause some banks and other lenders to decide not to loan you the money you need, but it can also lead to other lenders demanding a higher interest rate or imposing stricter conditions.

For many companies, banks, and other lenders, judgments of any kind are red flags that warrant denial of your application. In some cases, this denial will happen automatically when the MCA judgment shows up in your company's credit history. In others, you may have a chance to speak with a decision-maker, and you may be able to persuade the company, bank, or lender that you are a good investment despite your company's history of defaulting on its MCAs.

An MCA Judgment Can Also Affect Business Owners' Personal Credit Scores

As the Small Business Association (SBA) explains, some aspects of your company's credit can affect your personal credit as a business owner. The reverse is true as well. With regard to judgments for MCAs, even though the judgment will be against the business, business owners can still find that a judgment affects their personal credit as well.

There are three primary ways that a merchant cash advance judgment can negatively impact your personal credit as a business owner. First, you will most likely end up incurring additional costs, and these costs could potentially put you in a position where you can no longer afford to meet your personal financial obligations. Second, the merchant cash advance company may have a right to go after your personal finances for any deficiency that remains after collections (which is generally not the case for secured financing). Third, if your company files for bankruptcy or goes out of business, you may need to continue relying on your personal credit score (which, by that point, may be unrecognizably low).

How Long the Judgment Stays

As Business News Daily reports, while negative entries eventually fall off of your company's credit report, they can remain there for a decade or longer in many cases. This means that an MCA judgment could affect your company's creditworthiness long after your company gets out of default. Even if you start making timely payments to other creditors (if you have other creditors), the MCA judgment can remain an anchor holding your company down until it drops off of its credit history entirely.

In many cases, however, this won't matter. Once a judgment is entered against your company for defaulting on a merchant cash advance, the merchant cash advance company can immediately begin enforcing its rights in court. In many cases, by the time the judgment falls off of your company's credit history, it will no longer be an issue. This makes it all the more important to avoid defaulting and to explore alternatives if you are at risk of missing your next daily, weekly, or monthly payment.

FAQs

Can I Get a Judgment for a Merchant Cash Advance Default Removed from My Company's Credit Report?

You may be able to get a judgment for a merchant cash advance default removed from your company's credit report. If the merchant cash advance company did not follow all necessary legal procedures before obtaining the judgment, then it may not be entitled to enforce the judgment in court. This could also mean that it does not have the legal authority to disclose the judgment to credit reporting agencies. In this scenario, your company would be entitled to have the judgment removed from its credit report, and this can also potentially provide you with grounds to pursue an injunction against the merchant cash advance company and its attorneys in court.

Can an MCA Company Go After My Personal Credit?

It depends. In most cases, MCA agreements do not give merchant cash advance companies direct access to their borrowers' personal assets. As a general rule, MCA companies can only seize collateral and secure judgments against merchants that default. However, they are also entitled to pursue collections if the assets they are able to seize do not fully satisfy the company's defaulted obligations.

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