What is bad credit?
Bad credit refers to a low credit score, typically below 600, which indicates to lenders that an individual or business has struggled to meet their financial obligations in the past. A poor credit history can be the result of missed payments, default on loans or even bankruptcies. For example, a small restaurant owner who missed several loan payments during a slow season may have seen their credit score drop below 600.
In the world of finance, having bad credit can often feel like an uphill battle – it signals to lenders that you’re a high-risk borrower and as a result, many doors to traditional loans may remain closed. However, this is where merchant cash advances can be a lifeline. Unlike loans that rely heavily on your credit score, an MCA focuses on your business’s daily/weekly card sales and cash flow.
As long as your business generates consistent sales, you can qualify for a bad credit Merchant Cash Advance.
According to a 2024 report by Finder, 19.8% of people in the UK had a poor credit score.
Why get a merchant cash advance if you have poor credit?
1. Credit score isn’t the main factor
One of the biggest advantages of an MCA is that your credit score isn’t the primary consideration. MCA providers focus on your card sales and overall cash flow.
2. Quick access to funds
When you need immediate cash flow to cover expenses or seize growth opportunities, waiting for traditional loan approval isn’t practical. MCA offers fast funding, generally within 3 days, but same-day funding is also possible. This gives your business the capital it needs without any delay.
3. No collateral required
Traditional loans often demand collateral, such as business assets or personal guarantees. However, an MCA doesn’t require you to pledge any assets. This makes it a suitable option for businesses with poor credit and limited assets but strong sales performance.
| Getting a loan | Getting an MCA |
|---|---|
|
Credit score is an important consideration. |
Credit score isn’t the primary consideration. |
|
Long approval process. |
Quick approval. |
|
Collateral/guarantee needed. |
No collateral required. |
Do you need a Merchant Cash Advance?
What do lenders look for when giving bad credit merchant cash advances?
While bad credit may close the door to bank loans, Merchant Cash Advance providers take a different approach. They understand businesses with poor credit can still thrive, so they focus on factors beyond your credit score. But what exactly are lenders looking for when offering bad credit Merchant Cash Advacne?
1. Steady credit card sales
The first thing lenders look at is the consistency of your credit and debit card sales. Since MCA repayments are tied to sales, lenders want to see that your business processes enough transactions to cover the advance. Think of it this way: the more steady your sales, the better your chances of securing merchant funding.
For example, a small cafe with £10,000 in monthly credit card sales but a low credit could still qualify for an MCA.
2. Business longevity
While MCAs are more flexible than traditional loans, lenders still want to know your business has been around a while. Typically, they look for a business that’s been operating for at least 6 to 12 months. Why? It shows stability. If you’ve weathered a year or more of ups and downs, lenders are more confident you’ll be able to repay the advance.
3. Consistent cash flow
Cash flow is king. Lenders will dig into your bank statements and credit card processing history to ensure you have a solid cash flow that can handle repayments. They don’t just want to see that you make sales; they want to see that your business can sustain a daily or weekly deduction without feeling the pinch too hard.
4. Bank statements
Lenders often ask for 3 to 6 months of bank statements to get a clear picture of your financial health. Even with poor credit, solid bank statements showing steady deposits and manageable expenses can work in your favour. If you’ve been keeping your business accounts in good order, you’re halfway there.
Considerations when getting an MCA with bad credit
If you have bad credit and are considering an MCA, it’s important to think carefully before jumping in.
- Factor rates and fees: MCAs use factor rates instead of interest rates. They typically range from 1.2 to 1.5 and can significantly increase the amount you’ll repay. For example, if you borrow £10,000 with a factor rate of 1.5, you’ll have to repay £15,000. Make sure to calculate the total cost before signing.
- Repayment flexibility: MCA repayments are tied to your daily/weekly sales, which can be a blessing or a curse depending on your business’s cash flow. Ensure the holdback percentage (the percentage of daily sales deducted) is reasonable and won’t put a cap on your cash flow.
- Reputation of the MCA provider: It’s vital to choose a reputable MCA provider. Look for reviews from other businesses, especially those with similar credit situations, and check their track record. A provider that offers transparency, fair terms and solid customer service can make all the difference.
- Terms and conditions: Always read the terms and conditions thoroughly. Some MCA repayments may have clauses for penalties, early repayment fees or restrictions on refinancing. Make sure the terms are fair and allow flexibility.
Other financing methods if you have a good credit score
Now that we’ve discussed how to get Merchant Cash Advance with poor credit, let’s see some of the financing options if you have good credit.
- Business loans: You can access traditional business loans from banks and financial institutions. These loans often come with lower interest rates and fixed repayment terms, making them predictable and cost-effective in the long run.
- Invoice financing: If your business deals with unpaid invoices, invoice financing is a great way to access cash quickly. With good credit, you’ll get better rates and fewer fees when selling your invoices to the lender at a discount.
- Peer-to-peer lending: Peer-to-peer platforms connect businesses with individual investors willing to lend money. With good credit, you’ll gain access to better interest rates and larger funding amounts. This alternative to bank loans has become increasingly popular in the UK.
- Equipment financing: Need new equipment for your business? Equipment financing allows you to purchase or lease machinery, vehicles or technology using the equipment itself as collateral. With a good credit score, you can secure lower interest rates and favourable repayment terms.
How to improve your credit score?
With all the discussion of MCA with bad credit, it’s always good to remain on the bright side of the financial banner, i.e., having a good credit score. So how do you transform your poor credit score into a good one so you can qualify for the majority of financing options?
- Pay bills on time: This includes loans, credit card bills and utilities.
- Use less of your credit: It’s the percentage of your available credit that you’re using. Keeping this number low, ideally below 30% can improve your score.
- Check your credit reports for errors: If you find errors, such as incorrect payment statuses or accounts that don’t belong to you, contact the credit reporting agency to have them corrected.
- Maintain older credit accounts: The longer you’ve had credit, the better is it for your credit score. Avoid closing old accounts, even if you’re not using them regularly, as they contribute to the average age of your credit history.
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FAQs
A credit score below 600 is generally considered bad credit by most lenders. Scores in this range indicate a higher risk of default, making it harder to qualify for bank loans and other traditional financing options.
Merchant Cash Advances come with high costs, often in the form of factor rates that result in much higher overall repayment amounts than traditional loans. They can also affect cash flow since the repayments are based on daily or weekly credit card sales. Also, there’s no benefit of early repayment.
No, getting an MCA does not directly improve your credit score. MCA providers do not typically report to credit bureaus. Therefore, paying off an MCA won’t have a positive effect on your credit score.
