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How Long Will a Defaulted Merchant Cash Advance Haunt My Credit?

If you own a small business, you may have looked into merchant cash advances (MCAs) as a way to access capital quickly. MCAs provide funding that you pay back through a percentage of your future credit card sales. They seem fast and easy to obtain.However, what happens if your business struggles and you default on an MCA agreement? Unfortunately, defaults can haunt your credit for years to come. Let’s take a closer look at how MCAs work, why defaults occur, and how to limit the damage to your credit if you do default.

How Do Merchant Cash Advances Work?

Merchant cash advance companies provide funding based on a business’s expected credit card sales. Rather than receiving a loan, you get an upfront sum of cash. In exchange, the MCA company takes a fixed percentage of your daily credit card sales until you pay back the advance plus a fee.For example, an MCA provider may give you $10,000 upfront. You would then repay something like 15% or 20% of your daily credit card sales until reaching perhaps $15,000 total (the original $10,000 plus $5,000 in fees).

Why Do MCA Defaults Occur?

• Lower Than Expected Sales – If your sales drop below projections, you struggle to pay back the fixed daily percentage.
• Securitizing – Securitizing MCA loans provides capital for lending but incentives maximizing volume over loan quality
• Overreliance – This manifests through overreliance on limited data, ignoring total debt obligations, and rushing due diligence
• High Fees and Rates – The fees and equivalent interest rates on MCAs can exceed what businesses expect. This makes them difficult to repay.
• Lack of Underwriting – Some MCA providers do little underwriting and due diligence. They may give advances businesses simply cannot afford to repay.

Facing any of these situations can quickly lead an MCA agreement into default if your business cannot keep up with the fixed daily payments.

How Defaults Damage Your Credit

When you default on an MCA contract, the provider will likely send your account to collections. This leads to serious impacts on your credit:

• Collections Account – The collections account will show up on your personal credit report and drastically drag down your score.
• Court Judgements – MCA defaults often lead providers to obtain court judgements against business owners. These judgements also appear on credit reports.
• Credit Damage – With a major derogatory mark on your report, you may struggle to qualify for financing. This can further strain your business.
• Personal Guarantees – If you personally guarantee an MCA, the provider can pursue you personally for the debt. This places your personal assets at risk.

How Long Do MCA Defaults Stay on Your Report?

Unfortunately, like most defaults, MCA defaults can haunt your credit for years. Specifically:

• Collections Accounts – Unpaid collections accounts remain on your credit report for seven years from the date the account first went unpaid.
• Court Judgements – Court judgments also stay on your report for seven years in most cases, though paid judgements may disappear earlier.
• Bankruptcies – If an MCA default leads to personal or business bankruptcy, this can remain on your report for 10 years.

As you can see, defaulting on an MCA agreement causes damage that prevents you from rebuilding credit quickly. You may struggle with low scores and high-risk lending status for years.

Strategies to Recover from an MCA Default

If you do default, taking proactive steps can help minimize damage and rebuild more quickly. Consider the following:

• Seek New Financing – If possible, seek business financing through alternative channels to pay off the MCA. This removes the default from your credit report.
• Negotiate Settlements – You may be able to settle MCA debts for less than the full balance. Settled accounts still show for seven years but no longer actively update.
• Avoid Bankruptcy – Bankruptcy leads to the longest lasting credit damage. Explore other options first.
• Wait It Out – If you have no alternatives, continue making on-time payments on all other accounts. Good behavior slowly helps improve your scores.
• Consult Professionals – Talk to a business lawyer and credit expert for personalized advice on recovering from MCA defaults.

How to Avoid MCA Defaults in the First Place

Of course, you want to avoid defaults entirely if possible. Before accepting an MCA, be sure to:

• Base Projections on Realistic Sales Data – Be conservative in estimates to ensure you can meet repayment requirements.
• Understand Full Costs and Terms – Review the full contract to tally fees and know the equivalent interest rates.
• Assess Total Debt Load – Factor all existing debts into determining if you can handle more.
• Explore Alternative Financing – Compare MCAs to other products that may provide more affordable repayment options.
• Work Only With Reputable Providers – Check complaints and reviews to avoid predatory MCA companies.

Delancey Street Can Help With MCA Debt Relief

Here at Delancey Street, we understand the challenges business owners face. Our dedicated debt experts can help you address MCA debt through:

• Debt Consolidation – We consolidate multiple debts into more manageable payment plans.
• Debt Settlement – We negotiate settlements that resolve MCA debts for less than you owe.
• Debt Management – We provide customized debt relief advice tailored to your situation.

If you face overwhelming MCA debts, contact us today to discuss your options for relief. Our direct number is 212-210-1851. Our attorneys and financial experts work on your behalf to resolve debts and help restore your financial health.

How Long Do Defaults Stay on Business Credit Reports?

Like personal credit, defaults on business accounts also cause significant damage that can take years to fade. Business credit reports track:

• Business Collections Accounts – Unpaid collections remain for seven years from the initial delinquency.
• Tax Liens – Unpaid tax obligations stay for seven years after the filing date. Paid liens may disappear sooner.
• Judgements – Like consumer credit, most court judgments remain for seven years.
• Bankruptcies – Business bankruptcies stay on reports for 10 years from the filing date.

As you can see, a single default can tarnish your business credit reputation for nearly a decade. Be sure to seek help from a professional to address debts before they ever reach the stage of collections, tax liens, judgments or bankruptcy. This can help minimize long-term damage.

How Personal Credit Impacts Your Business

When you form a small business as a sole proprietorship or single member LLC, your personal and business finances stay closely linked. As a result, negative marks on your personal credit reports indirectly hurt your business as well.Poor personal credit scores can make it much harder to secure financing for business needs. This includes funding options like:

• Small Business Loans
• Business Credit Cards
• Commercial Real Estate Loans
• Equipment Financing
• Business Lines of Credit

Lenders view personal credit reports to evaluate your reliability in handling debt. Derogatory marks related to an MCA default raise red flags about your ability to manage borrowing.Even if you form a corporation or formal partnership, lenders often request personal guarantees from owners on business financing. This means your personal credit still impacts approval chances and terms.

Key Takeaways

• Merchant cash advance defaults lead to long-lasting damage across both personal and business credit reports.
• Collections items, tax liens, judgments and bankruptcies can impact scores for seven to 10 years.
• Seeking alternative financing to resolve debts ASAP helps minimize harm to your credit.
• With professional guidance, you can address MCA debts before they ever reach the stage of collections.
• Carefully evaluating affordability before accepting an MCA helps avoid painful defaults.

Facing MCA debt you cannot handle? The expert debt relief team at Delancey Street helps business owners form affordable repayment plans, negotiate settlements, and restore their financial health. Contact us today at 212-210-1851 to discuss your situation in a free consultation.

Frequently Asked Questions

How long do merchant cash advance defaults stay on your credit?

MCA defaults typically lead to unpaid collections accounts, judgments, or even bankruptcies. These items remain on your personal and business credit reports for around seven to 10 years depending on the exact derogatory mark.

Can you remove an MCA default from your credit report?

If you can secure alternative business financing to pay off the defaulted MCA, you may be able to remove it from your credit reports. The debt must be fully paid to eliminate the original default. Debt settlements also lead to closed accounts but still show for seven years.

How do MCA defaults affect your ability to get financing?

MCA defaults make it much harder to secure financing like small business loans for around seven years. Lenders view defaults as signs you may struggle to handle repayment terms. You often need to rebuild credit for some time before qualifying again.

Should you avoid merchant cash advances?

Merchant cash advances provide easy access to funding but also come with high costs and risks. They work best for very short term needs. Explore all alternatives first for longer term capital needs to avoid affordability issues that lead to defaults.

Final Thoughts

As appealing as fast funding may sound, merchant cash advances come with serious risks that small business owners must carefully weigh. If your sales and cash flow falter, you may face years of credit damage while trying to repay an overwhelming MCA agreement.Seeking help quickly after defaults occur can limit harm to your scores. This helps you get back on track faster through options like debt consolidation and settlements. Avoiding the need for defaults in the first place remains crucial, however.Carefully evaluating if you can truly afford MCA repayment terms for the full duration prevents nasty surprises down the road. Working with reputable providers also reduces risks. If you do consider an MCA, be conservative in estimates and understand the complete costs.Most importantly, discuss options with financial professionals before moving forward with any financing product. At Delancey Street, our experts offer free consultations to small business owners struggling with overwhelming debts. Contact us at 212-210-1851 to explore personalized debt relief solutions.