Merchant Cash Advance With Bad Credit

By Lauren Ward · May 22, 2024 · 8 minute read

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Merchant Cash Advance With Bad Credit

A merchant cash advance gives businesses with bad credit an opportunity to access financing.

In exchange for receiving a lump sum of cash to use at your discretion, the lender receives a portion of your company’s credit card and debit sales until the balance is paid in full. Collateral isn’t always required and there are also typically less stringent credit requirements compared to a small business loan.

However, merchant cash advances are structured much differently than traditional financing options. Be sure to understand the details in full and seriously weigh the pros and cons before making a decision.

What Is a Merchant Cash Advance for “Bad Credit”?

Whether or not a business’s or an individual’s credit is considered “bad” is ultimately up to a lender and what they see as risky. However, according to FICO® rankings, a score of less than 580 is considered “poor,” while a score between 580 and 669 is considered “fair.”

A merchant cash advance is a type of small business financing that provides you with a lump sum of cash from a lender at the beginning of a borrowing term. Instead of making fixed payments like you would with a loan, however, you consistently repay the funds with a portion of your sales until the balance (including additional fees) is gone. In addition, instead of accruing interest as with a traditional loan, lenders apply factor rates to determine how much you’ll need to pay for the borrowed sum.

Factor rates will be explained in detail in the next section, but in general, the higher the factor rate, the more expensive the merchant cash advance will be.

With a merchant cash advance, borrowers with less than stellar credit may be more likely to qualify for funding than with a traditional small business loan. This is because merchant cash advances are repaid based on a businesses future sales, so credit scores aren’t as much of a deciding factor. Plus, the application process is generally fast and you typically get access to the funds quickly if you qualify.

Recommended: Bad Credit Business Loans

How Merchant Cash Advances Work

A merchant cash advance works differently than other kinds of small business loans, so it’s important to understand all of the components of the transaction.

Once you receive the lump sum, you’ll have a set period of time to repay the total owed amount — which includes the principal as well as fees. Depending on your borrowed amount and your sales volume, the repayment term could last anywhere between three months and three years.

Rather than being charged a fixed interest rate like with a loan, a merchant cash advance assesses a fee as a factor rate. A factor rate is a multiple of the amount you’re being funded. For example, if your factor rate is 1.2 and you borrow $50,000, you would multiply the two together to determine the total balance to be repaid.

1.2 * $50,000 = $60,000

As you can see in this hypothetical scenario, it would cost $10,000 to borrow $50,000 with a factor rate of 1.2. There may be other types of fees you need to pay, as well.

The next concept to understand when considering a merchant cash advance with bad credit is the holdback amount. This refers to the percentage of your credit card or debit card sales that will be diverted to repaying the cash advance. In general, you can typically expect a holdback amount to range between 10% and 20% of your sales (or sometimes up to 30%). It is important to seriously weigh this along with your factor rate to avoid any cash flow issues — and the possibility of defaulting — during the repayment period.

Recommended: Working Capital Line of Credit

Qualifications and Application Process

Qualifying for a merchant cash advance typically relies more on your company’s financial transactions than credit history, which is why businesses with bad credit may opt for this type of financing. Merchant cash advance companies may also have a minimum threshold for monthly credit card sales.

While the application process may not be as extensive as a traditional small business loan application, still expect to pull some of your company’s financials together. Here are some common documents that may be requested:

•  Several months of bank statements

•  Tax returns

•  An accounts receivable summary report

•  A profit and loss statement

While there will likely be a credit check during the application process, your company’s daily sales are generally weighed more heavily than its credit score. In many cases, you don’t need to provide a personal guarantee, which makes you personally responsible for the debt if your business is unable to repay it, and can instead keep the advance completely in the business’s name. If you are requesting a large sum, however, you may need to provide that personal guarantee or some other type of collateral.

Pros and Cons of a Merchant Cash Advance for Bad Credit

A merchant cash advance may be a financing solution to consider in some scenarios, but it’s worth fully weighing the pros and cons of this type of financing.

Pros

One of the biggest benefits of using a business cash advance is that you can get lump sum financing even if you or your company has bad credit. You can also typically expect to receive funding quickly if you qualify, often within a day or two of applying.

Cons

These conveniences come with a hefty price, however. Merchant cash advances usually involve extremely high fees and factor rates. Typically interest rate limits don’t apply since they’re technically not loans. Another drawback is that there aren’t any savings if you pay off your balance early, as there might be when you make prepayments on a traditional business loan. And you may experience a cash flow crunch because of the daily holdback amount.

Merchant cash advances are also only available to businesses with credit or debit sales, such as retailers or restaurants. And finally, your payments on a cash advance are not reported as positive payments on your credit report, so it doesn’t help to build your business credit.

Alternatives for Bad Credit Business Financing

Businesses with bad credit may consider other alternatives before deciding on a merchant cash advance. Some lenders specialize in bad credit business loans, including those designed specifically for startups and women business owners. It may be challenging for applicants with less-than-stellar credit scores to qualify for a business loan. And keep in mind that terms and rates may vary based on personal qualifications and lender policies.

Another option is a business line of credit. It may be difficult to qualify with traditional banks, but you may find some alternative online lenders who offer lines of credit for businesses with sub-optimal credit.

Finally, invoice factoring could be another viable choice if your business needs better cash flow while waiting for companies to pay their invoices. The factoring company fronts you the majority of the amount of your unpaid invoices, but first subtracts a percentage as its fee. Once the invoices are collected, you’ll receive the remaining balance. The price of invoice factoring can be very high, however. Plus you may have to rely on the factoring company to manage your client relationships when collecting invoices.

Compare Financing Options for Your Small Business

A merchant cash advance offers quick and easy financing for small businesses with bad credit, but there is substantial risk involved. Before accepting a merchant cash advance, review all of your options and evaluate your company’s cash flow to make sure it’s strong enough to support the ongoing holdback amount.

Trying to figure out your best option for securing a small business loan can feel overwhelming. We’re here to help you spend less time on the loan search and application process so you can spend more time taking care of your business.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.


With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can someone with bad credit get a merchant cash advance?


Creditworthiness matters less when applying for a merchant cash advance than it does for a traditional business loan. Instead, approval typically relies more heavily on the volume of retail transactions. If you have a high daily volume of credit card purchases, having a credit score on the lower end of the spectrum may not harm your chances of approval for a merchant cash advance.

Are merchant cash advances a good idea?


The benefits of a merchant cash advance include quick access to funds and an application process that places less emphasis on your company’s credit. In some cases, you may not have to provide a personal guarantee, meaning your own credit and assets aren’t on the hook for the borrowed amount.

However, the fees are extremely high compared to many other types of financing and are usually automatically deducted from your daily card transactions. Both of these factors can cause a major disruption to your cash flow.

Also note that even if you’re able to pay off the balance on a merchant cash advance ahead of schedule, this won’t likely lead to any savings, as it might with a traditional loan. This is because the fees due do not amortize as they would on a traditional loan, which could allow you to save money in interest by repaying early.

Does applying for a merchant cash advance involve credit checks?


There’s a good chance that your application for a merchant cash advance will involve a credit check. However, approval relies more heavily on your sales volume. If you’re worried about a hard check damaging you or your business’s credit score, ask the company ahead of time what type of check they run.

What happens if you default on a merchant cash advance?


Defaulting on a merchant cash advance comes with serious consequences. The lender may apply late fees that increase your balance and also report the delinquency to the credit bureaus. Your personal credit may also suffer depending on whether or not you signed a personal guarantee for the advance.

What is needed to apply for a merchant cash advance?


Requirements may vary from lender to lender, but generally, you’ll need to provide basic financials in order to apply for a cash advance, such as bank statements and a profit and loss statement. The cash advance lender may also run a credit check.


Photo credit: iStock/shapecharge

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