When your business signs up for a Merchant Cash Advance, any MCA lender in the UK will have to perform a credit check to get an idea about the financial health of your business. If you are unfamiliar with the term right now, it’s okay because that is what we will talk about further.
What is MCA
Merchant Cash Advance (MCA) is a financial solution used by SMEs and enterprises in the UK to get immediate access to cash to improve cash flow for a business. When you sign up for MCA, you attain cash funds called an advance in exchange for the sales of your future card sales. The repayment takes place over a period of time with a fixed fee called a factor rate.
Please keep in mind that MCA is only applicable to card sales and not cash-based transactions.
Difference from traditional loans
Traditional bank loans require collateral to grant you a loan. Additionally, the application process for a bank loan is hectic because banks look at multiple factors of your business like your credit score, credit history, and current or outstanding loans. This process of analysing your business performance is called a credit check.
On the other hand, MCA lenders don’t require collateral to grant you a loan, you also don’t necessarily need to have a good credit score.
The need for a credit check
Since MCA lenders don’t require collateral, they associate a certain risk with each business which is reflected in the factor rate. This factor rate determines the profit earned by the MCA lenders. It is a fixed ratio of pennies charged per pound of the advance sum of money. To be specific, a factor rate of 1.2 means that for each £1 received in advance, you’ll pay £1.2 from your future card sales.
MCA lenders need to make sure that they are doing business with a business that is capable of paying back the sum of money on time. To make their financial risk worth it, MCA lenders perform a credit check before giving you a quote for the factor rate.
What is a credit check for MCA?
So in this credit check, MCA lenders check for the volume of card transactions, business profitability, and credit rating. The criteria for these credit checks are comparably less strict than the traditional credit checks performed by the bank. We will look into it further.
Types of credit checks
There are two basic types of credit checks:
- Soft credit check
Soft credit checks are the ones performed by the MCA lenders as we have mentioned before. A soft credit check lets your MCA lender know your business performance and loan history.
On a bigger scale, this credit check is just to get an idea of your business profitability to weigh how much risk it is worth. It’s not a crucial factor in deciding whether you’ll get MCA funding or not because it is ultimately focused on your future card sales, not your past financial decisions.
Even if a lender performs a credit check and your contract doesn’t go through, don’t give up because the financial market in the UK is competitive and you’ll find another lender who suits your business terms better.
- Hard credit check
A hard credit check is conducted traditionally by a bank, and it shows much more details about your business conditions as compared to a soft check like your credit history, previous loans, any ongoing loans, and more.
How does an MCA impact your credit score?
Unlike a traditional bank loan, MCA doesn’t show up on your credit history so it doesn’t have any outright impact on it. How you manage your repayments and your experience with your MCA lender is more important in this case.
Repayment behaviour
Every MCA lender has their own contract terms and repayment span depending on your business. What’s important is that repayments should be made on time. Even though overall MCA doesn’t negatively impact your score, missed and delayed payments will definitely do.
Missed repayments
In case of missed or delayed repayments, you must communicate with your lender. Such late payments can harm your reputation, and penalties and also show up in your credit history as a negative thing if the lender raises this issue.
Repeated use of MCA
If you have a rocky experience with an MCA, you missed your repayments a few times or delayed them, it will cause inconvenience the next time you need an MCA to manage your cash flow. Also, keep in mind that MCA is a financing solution and should only be used for short-term fixes. Constant and repeated use of MCA doesn’t look good as it indicates that you might need a long-term financing solution instead of a temporary one. MCA is one of the most popular financing solutions that can help your business to improve cash flow for the short term. ComparedBusiness can help you choose an MCA provider that supports your need of your business.
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