MCA Credit Reporting and Credit Checks: the Process, Impact, and Consequences

It is important to understand the merchant cash advance credit reporting and credit checking process before applying for an MCA. Lenders that provide MCAs will evaluate your creditworthiness through credit checks during the application process, so it’s very important to understand what type of credit check these lenders complete because some types of credit checks can negatively affect your credit score.

This article provides insights into the MCA credit reporting process, covering credit checks, reporting practices, and how to protect your current credit score when you’re applying for an MCA so there are no negative consequences.

Too many hard inquiries in a short time could make it look like you’re seeking loans and credit cards that you may not be able to pay back.

How MCA Providers Check Your Credit Report

MCA providers have two ways to check your credit report before extending a cash advance to your business. The two types of credit checks that can be carried out are called soft credit checks, also known as soft credit pull, and hard credit checks also known as

Let’s look at each of these two types of checks in more detail:

1. Hard Credit Checks

The first type of credit check an MCA provider could conduct is called a hard credit check. This is where the MCA provider examines your credit file to determine the risk you pose as a borrower if they decide to lend to you. These hard inquiries are logged on your credit report, allowing other lenders to see the history of lenders that have accessed your credit report. Lenders examine your recent credit report inquiries made by other creditors to assess risk. A high number of credit pull requests can send a negative signal to a lender.

2. Soft Credit Inquiries

The second type of credit check is called a soft Credit inquiry, sometimes known as a soft credit check or soft credit pull. This occurs when an MCA provider or lender checks your credit report. But unlike hard credit checks, soft inquiries do not leave a log of the MCA provider making the check.

Why You Should Work With MCA Providers that Do Soft Credit Checks

Only applying to MCA providers that use “soft” credit checks is really important. Here’s why:

Keeps Your Credit Score Safe

Soft checks do not harm your credit score, unlike “hard” checks. When added to your credit history, they can cause your credit score to drop by about 5 points, but occasionally it can be more. With soft checks, you don’t have to worry about any adverse impact on your credit score.

Protects Your Privacy

Soft credit checks do not appear on your credit report, which means they are invisible to other lenders. This allows you to keep your financial moves private, preventing other lenders from knowing that you have applied for an MCA or are in the process of applying for one.

Freedom to Search for Deals

Soft checks enable you to apply to multiple MCA providers without harming your credit score or notifying them that you’re considering other options. This allows you to simultaneously apply to several MCA providers, comparing rates and terms discreetly without revealing that you’re shopping around for the best deal.

MCA Credit Reporting

MCA providers do not report MCAs or repayments to credit bureaus. This is because MCAs are not classified as loans, they are classified as cash advances on future revenue. Not having your MCA being reported to credit bureaus has two main consequences. 

Credit Score Consequences of No Reporting

Your MCA isn’t reported to credit bureaus, so making payments on time or settling early won’t improve your business credit score. Unlike a loan, which would positively affect your credit if you pay on time, an MCA offers you no such benefit.

Credit Score Consequences if You Default

If you default on your MCA, the initial default will not appear on your credit report. If an MCA provider sends your debt to a collection agency or to an attorney for recovery. Failing to pay could lead to threats against your credit report. If your default ends up in a lawsuit, and if the judgment is against you, it may appear on your credit report, negatively impacting your credit score.

Strategies to Safeguard Your Credit Score During an MCA

To minimize risks to your credit score while engaging with an MCA, consider the following:

1. Timely Repayments

 MCAs feature automatic daily deductions, simplifying the repayment process. If you notice any issues with the deductions, contact your MCA provider immediately. A single missed payment technically puts you in default of your MCA agreement.

2. Limit Hard Inquiries

Avoid applying for multiple MCAs or loans in quick succession from lenders who perform hard credit checks, as this will negatively impact your score.

3. Open Communication

If you are struggling to repay your MCA, reach out to your MCA provider. They are often willing to negotiate terms to help you steer clear of default.