How MCA Default Affects Your Business Credit Score?

The phone calls have been going on for weeks. Your MCA lender has identified a dramatic decrease in card sales, and the daily holdback amount is simply not meeting their requirements. The very possibility of default is being discussed; you may very well be wondering what this even means in terms of your business credit score.

This is a concern that many business owners face, and the reality is that it is far from simple. Default rules for Merchant Cash Advances are not as straightforward as regular loans. A MCA default enters a ‘ gray zone ‘ that is determined by a few factors. Let’s explain what happens when your MCA gets off on the wrong track, and, importantly, what you can do for yourself before things get out of hand.

Understanding the MCA Credit Reporting Landscape

First of all, very few MCA lenders report payments to business credit bureaus. This is unlike other types of business financing, which show up on your report from day one showing all payments made.

Why the silence on MCA reporting? The reason has to do with how MCAs actually work. “MCAs are considered to be a purchase of future receivables. They are not loans.” This has a very important side effect: many providers of MCAs remain beyond the usual reporting channels for credits. When all goes well, you will not have any MCA shown on your credit report.

But when a crisis occurs, the reporting can quickly shift.

Factors Triggers Default by MCA

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Being informed about the meaning of default flags is important. For traditional loans, the situation is crystal clear, miss one payment, and you default. But MCAs have the complication of automatic payments made through holdbacks of sales from cards.

Typical default cases are:

• Extreme reduction of sales: In a situation where the number of processed units is reduced to a point where repayments become insignificant, even if the holdback system is effective, a default may be declared.
• Processor swaps: Some agreements place restrictions on processor swaps without the other party’s consent because it will interfere with the holdback. A processor swap may contain clauses that put the contract under default.
• Business closure: If you choose to close your business and/or stop processing cards, it’s considered to be in default.
• Non-Compliance with the terms: Additional financing that conflicts with the MCA, submission of incorrect information, and other violations.

The Credit Score Impact Pathway

How an MCA can cause your credit score to decline when it defaults:

• Direct Bureau Reporting: Your providers can report the default to Dun & Bradstreet, Experian Business, or Equifax Business, and a negative tradeline will be created, which will lower your score by as much as 50-100 points or more, depending on your credit file.
• Collections: In case of being sold to a collector, that particular company will probably report it, and collections can be extremely damaging to credit score for up to seven years.
• Legal judgments: If the court decides against you, your judgments will appear in public records and will be noted as your failure to pay your debts.
• Personal credit effect: If you put your personal guarantee on the loan, the default may appear on your personal credit record, affecting mortgages, car loans, credit cards, and sometimes job opportunities.

Beyond the Score: Ripple Effects

Credit damage is just the tip of the iceberg. MCA Defaults may set off a domino-effect of events for your business:

• Industry Black Listing: The world of alternative lending is a small community. Failure to repay one MCA lender could give other lenders pause due to the information sharing that occurs within the industry.
• Banking relationship strain: With the presence of the UCC lien, there may be aggressive collection actions taken by the lenders that trigger the bank’s attention to the problem. They might freeze the bank accounts or stop the flow of funds during strained periods.
• Credit from suppliers: The credit score of your business is used as a basis by your suppliers in determining whether they can credit you. This may place you under cash on delivery if your credit score is affected.
• Increased financing costs: When you can subsequently qualify for financing, your rates will be higher because of your risk having been proven.

The Personal Guarantee Wild Card 

Since you guaranteed the debt personally, you’re no longer behind the protection of the corporate veil. The MCA provider now has recourse to personal property: home, cars, savings. The default reflected in a personal guarantee could transfer to a personal credit record, which takes longer to repair than a business credit record.

Prevention Is Everything

The most prudent course is not to default on your loan. If that is your situation:

• Act early: Contact your MCA lender before the problem becomes acute. Most will work with you to restructure your loan if you act.
• Document everything: Even if it is a problem on your end, it is a good idea to document everything. Providers will be more likely to work with you if they see your situation.
• Refinance Considerations: At other times, a better loan option exists whereby another loan is used to repay the MCA.
• Consult an attorney: If default appears imminent, consult a commercial debt attorney about your options under your particular agreement and applicable law.

 The Bottom Line 

A default by MCA can negatively affect your business credit, especially if a default results in a collection, a judgment, or a direct report to the bureau. This can be further aggravated if a personal guarantee is extended for the cash advance. The trick is that the consequences of an MCA are not automatic, as with a loan default, but where they do happen, they can be serious and lasting. 

Look after your credit file by lending sensibly, maintaining regular contact with lenders, and avoiding personal guarantee defaults if at all possible. Your business credit score counts as one of your greatest assets. However, once it is harmed in any manner, it takes a very long time to reverse, longer than it took to build it in the first place.