Do Merchant Cash Advances Affect Credit Scores?

 

You have come to the conclusion that you desperately need additional funding for your business.

You may not qualify for a traditional loan (or need very quick funds) and you’ve had brokers contact you about a merchant cash advance. You may be wondering how applying for and receiving a merchant cash advance may impact your credit scores.

We hope that we can answer some of your questions here.

The Application Process and Credit Pulls

To begin, in order to receive a merchant cash advance you must go through an application process. During this process you will be asked for your social security number and approval to pull your personal credit.

Although a merchant cash advance is a loan for your business, personal credit is pulled to see what kind of liability you may hold. The personal credit examination is designed to see how responsible you may be regarding paying your debts.

Most funders require at least a 500 credit score to move forward with any type of funding, although there are certain funders that will go lower than a 500 score. When you sign your merchant cash advance paperwork, you will sign both on behalf of your company and yourself, personally.

A merchant cash advance broker usually works with multiple funders. We have seen brokers advertise that they work with over 100 funders. They will submit your file to as many as they can, hoping to get you the best deal possible (or to get themselves the highest commission).

This can be a problem because each lender has to pull your credit to see if you pass or fail their credit requirements.

There are two different kinds of credit pulls that can be completed. It is very important to make sure the funder uses one type over the other to ensure your credit score does not go lower due to your credit being pulled multiple times. It is also important to make sure that you apply for your advances within a certain time period.

Soft Inquiries

The first type of credit pull is called a “soft inquiry”. This type of credit pull will not affect your credit score. This is how employers will often do background checks on you. It is also how credit card companies decide who they will send or not to send offers of credit.

You always want your credit being pulled with a “soft pull” and not the second option called a “hard pull”.  A hard pull may or may not show up on your credit report but there is a chance that it will impact your credit.  It depends on the particular bureau from where your credit report was pulled.

Hard Credit Pulls

A “hard pull” is likely to negatively affect your credit score. Most mortgages and loans use this type of credit pull to qualify you. This type of “hard” inquiry can reduce your credit score by up to 5 points.

Luckily, there is a measure in place to keep your score from getting knocked too low if multiple hard pulls take place over a short period of time. If multiple lenders do the same type of hard pull within a 45 day period, it will only be considered as one hard pull and you will only be hit 3 to 5 points one time.

You do need to be aware that each hard pull outside of that 45 day period, will show up on your credit report. Anyone who views your credit report will be able to see each inquiry. This means every lender who may be willing to offer you some type of funding will see any previous pulls that other lenders have done.

This can sometimes deter a lending institution from considering you for funding because if there are too many inquiries, you may seem desperate and the proposed lender may consider that a red flag.

Merchant cash advance funders use both methods to pull credit. If you are concerned about your credit score being affected, you should make sure you only apply to funders who use a “soft” credit pull to qualify their clients. Unfortunately, many merchant cash advance lenders will do a “hard” pull. If you are worried about your credit being affected, you need to ask and be aware of what type of pull will be done when you are applying for a merchant cash advance.

Impacts of the Advance on Your Credit Score

When it comes to the actual merchant cash advance you will receive, you do not have to worry about your credit being affected. The vast majority of merchant cash advances will not report to any of the credit bureaus. It is simply not in their business models to report to the credit bureaus.

Will Paying Off the Advance Raise My Credit Score?

We have also been asked by many of our clients and potential clients, if paying off a merchant advance in full will raise my credit score. The answer in no. Paying off a merchant cash advance will not raise your credit score in any way.

On the opposite side of that same question, if you default and stop paying your merchant cash advances, it is highly unlikely that will negatively impact your credit score.

What Actions Might Impact My Credit Score After Taking a MCA?

Merchant cash advances carry very high interest rates and fees. We see many clients default on their advances because they were not prepared for the daily debits that come out of their accounts each and every business day.

Our experience has been that once a borrower begins to default on one or more advances, that borrower will do anything within reason to secure some type of additional funding to keep the business afloat.

Seeking additional funding during your period of delinquency will likely result in new credit inquiries and possible “hard” pulls from other potential lenders. This set of circumstances will likely further lower your credit score. Once you start applying for additional loans and your credit is pulled again or repeatedly, this will most likely lower your score.

Credit Impacts of Defaulting On a Merchant Cash Advance

What happens when you default on a merchant cash advance?

When you default, your advance will usually be assigned to a collection firm or an attorney’s office. They will try to get you to pay back the money that is owed. If you do not pay the collection company, they could possibly threaten to target your credit report.

The collection agencies could try to report those accounts to the credit bureaus. What is more likely is that an attorney hired by the merchant cash advance company or possibly hired by the collection firm, will file a lawsuit against you.

If they file suit and they win a judgment, that judgment is likely to show up on your credit report.  The defaulted loan and money judgment would then likely appear on your credit report just as any other judgment would.

This will, of course, lower your credit score. The best way to protect against this happening, if a merchant cash advance company sues you for collection of monies lent, is to hire an attorney to defend that suit and to negotiate on your behalf, in order to ultimately avoid a judgment.

Final Considerations

Although merchant cash advances generally do not greatly impact your credit score (absent a judgment), they are very expensive and volatile loans. The rate of default on merchant cash advances is extremely high – much higher default rates than normal loans.

You may be worried about your credit score but most importantly you need to focus on getting yourself out of any merchant cash advances you may currently be in.

If you have found yourself stuck with merchant cash advance debt and need help or guidance as to what your best options may be, please call us. Our team at Business Debt Law Group always offers complimentary consultations to help business borrowers in any way we can.