How Does Credit Score Impact MCA Approval For Seasonal Businesses?

The Score That Almost Didn't Matter

He sneaked a look at his credit rating before pursuing loans to finance his business and felt the familiar pang in the chest: 592. Not catastrophic but nowhere near the 680 to 720 that banks demand. "The number wasn’t misleading," he reflected: "I’d had a medical issue three years ago that had led to a series of late payments and collections that were still marring my report despite the $380,000 that the Christmas tree farm took in the six-week season."

He had applied at his current bank not once but twice before. Both times, the loan officer had been enthusiastic, only to suddenly become sorry when the report popped up on the screen. “We'd love to help, but we require a minimum credit score of 680, and we'd like to see regular income each month, you understand.”

It is September now. He had to borrow $45,000 by October 15. Then he could capitalize on the November-December rush. Now, without that money, his whole year would fall apart. Since his score is 592, he saw no other choices.

“But then his accountant told him this: Merchant cash advances don’t look for yesterday’s imperfections quite so hard as banks do. ‘They care more about your December business activity, not your credit from three years ago,’” he said.

“Desperate but skeptical,” Marcus applied. The resultant “pre-approval” arrived after exactly 26 hours at a price tag of $45,000. The “underwriter” assessed Marcus’s credit profile for a dramatic two minutes before analyzing his November/December “processing statements” from the past three years. These showed a payroll north of $65,000 each week.

The credit score hadn’t gone away. It just wasn’t the controlling factor in the transaction the way he’d expected.

The Credit Paradox, Unravelled in Plain Terms

• One thing that lots of seasonal businessmen neglect to remember when it relates to the use of the merchant cash advance (MCA) credit check is this: Absolutely, credit checks are performed on you, and indeed they do care about your score, it's just different from what banks do.
• "Banks look at credit scores like they're crystal balls that can predict the future," says Katriina Tahvanainen, financial activist and author of "Bugged: How Your Phone Systematically Scares, Cheats, and Screws You." "If it's low, it's like, 'Hey, you have a high chance of default, so we don't want you. Sorry, that's it.'" Their reasoning
• MCA providers are asking a whole other question: “Can money flow through your business in sufficient volume to pay off our daily fee?” The question of your credit worthiness and your organization is, in a way, answered through your credit score, but your processing statements will tell if you truly The question of your creditworthiness and your organization is, in a way, answered through your credit score, but your processing statements will tell if you truly can afford the payments.

Can afford the payments.

Take Marcus, whose score of 592 raised some concerns. "There have been some credit hiccup situations in the past. What happened and how did they get resolved?" Marcus gave his explanation about the health issue, his repayment arrangement, and his current good standing. The underwriter acknowledged his input and proceeded to others. Attention turned to the very essential things. It is his processing volume of about $260,000 in his six-week peak performance from last year, his positive yearly growth rate, that he has no existing MCA debt, and his utilization plans.

Where the Real Credit Thresholds Sit

Now that we have

MCAs: Are More Forgiving Than Banks, Though They Too Have a Threshold:

• Below 500: Red flag territory. Bankruptcy, collection activity, and charge-offs are in process. Some MCAs will not finance you in these circumstances unless your processing volume is exceptional, while some will not finance you at all below 450, no matter your cash flow.
• 500-600 (Marcus’s zone) : Very common for MCA loans. Mostly acceptable if other parameters are good. Could imply a slight jump in the factor score, maybe 1.37 over 1.32, but wouldn’t be a barrier to approval.
• 600-680: Comfortable middle. Credit rating isn’t great, but it isn’t a problem. Approval relies mostly on volume. 
• Above 680: Strong offer. May be able to turn in a small tweak on terms, but not a significant one, since the volume of business is a heavier factor than credit score.
• The rule is simple: Credit scores are merely the floor, not the real gatekeeper. Once you break through 550-600, whether you are accepted is as much dependent on your ‘processing statements’ as your FICO score."

Why Seasonal Businesses Have an Actual Advantage?

Interestingly, companies that operate seasonally and have issues with credit are more likely to receive funding than non-seasonal ones when creditworthiness is considered.

Two cases for comparison:

Year-Around Restaurant: FICO score: 590, Volume: $28,000 in constant recurring credit card processing business. The business is small, and the credit score is questionable. Will they be able to make payments in a slowdown in business?

Christmas Tree Farm:

• 590 credit rating,
• off-season processing of just $8,000,
• but an enormous $260,000 in a six-week seasonal operation. 

Here in the Christmas Tree Farm case, the credit concerns are outweighed by the high credit

Marcus’ situation was the epitome of this. Based on a holdback of 12%, he would take home $31,200 in his six weeks of peak production ($260,000 × 12%). With a $45,000 advance and a 1.34 factor rate, he would need to repay $60,300. The arithmetic worked: in one successful year, he could pay off 95% of the debt.

The seasonal crunch was significant because it was tangible evidence of when and in what manner the repayment could be expected to happen. No guesswork was involved in whether there was going to be steady cash flow every month or whether there was going to be peak season capacity that could be relied upon despite issues of credit

What really drives people’s approval?

For the following types of businesses, creditworthiness takes a backseat to the 

• Peak-Season Processing Volume: It is clear that Marcus’s $65,000 in weekly processing volume in November and December had much greater importance than his score of 592. It indicated his ability to repay. - Multi-Year 
• Seasonal Consistency: The fact that there had been three years of consistent performances during peak seasons indicated sincerity. The current season would act similarly. 
• Time in Business: Seven years in business showed it had staying power. The establishment had been able to adapt through seasonal changes, as well as several business cycles.
• Current Obligations: Marcus had no MCA obligations, and his entire cash flow was available. A business could have excellent credit and two MCA agreements taking 30 percent of its revenue and not qualify, but Marcus, who has poor credit and no MCA obligation, is approved.
• Capital Deployment Plan: It seems like they are putting money into equipment, inventory, and manpower to generate revenues. It would also seem suspicious if they put it under 'working capital,' or if it is designed to offset losses in the slow season

The Credit Conversation

When underwriters engage in credit talk, it typically follows this pattern:

“Your score is 592. What happened?”

• The incorrect answer: “I don’t know, credit is complicated, banks are unfair…”
• Right answer: “A medical emergency in 2021 caused problems with payments. I addressed issues in payment plans, and there have been no problems for two years. Business was never affected.”

"What the underwriter might be trying to figure out: "Is this a storm that’s been blown over, or some sort of financial dysfunction that might blow the business off course?" If the former, they check that off and go on to the next thing you have to explain regarding the processing of accounts." "Instead of reading about the issues described

The Bottom Line

He got $45,000 financing with a credit score of 592, which would have prevented financing from a bank, and this happened in only 26 hours. He earned $287,000 during peak season. The MCA was fully paid off by January. He embarked on a debt-free slow season. The credit score does not disappear. In fact, it was a part of the process. 

The credit score most likely increased the factor rate by a value between 0.04 and 0.05 but still didn’t prevent financing. In the case of seasonal concerns, credit scores are only partially relevant. If your credit score is above 550 and your processing rates are good during your high season, then approving your credit, despite having credit issues that would ruin a loan, won't be an issue.

The key is understanding that MCA providers are buying your future receivables, not lending based on past behavior. Your peak season's projected processing matters more than your three-year-old late payment. Your proven seasonal capacity matters more than your credit utilization ratio.

Sometimes the financing that cares least about your past is exactly what you need to fund your future.