MCA Short Case Study: Bad Funding With Little to No Credit

notorious-naim
May 31, 2023
Small and medium-sized enterprises (SMEs) often experience cash flow problems, which can hinder their growth and success. These issues can lead to businesses seeking financial assistance through loans, but traditional lenders may not be willing to lend money to businesses with bad credit. In such situations, a merchant cash advance (MCA) may be a viable option.

In this article, we will look at a short case study of a business with bad funding and little to no credit trying to secure an MCA.

Why is Merchant Cash Advance Necessary?

Before jumping into case studies, you need to understand what MCA is, and why it’s necessary for certain small businesses. MCA, or Merchant Cash Advance, is a method of financing that is reliant on the potential of a business organization. If you’re procuring a loan for a small business, your options may be limited due to a few factors that only MCA can bypass.

MCA offers a quick financing option for businesses with minimal credit requirements that suits small businesses. Their flexible repayment structure is also one of the core reasons why certain small businesses will benefit heavily.

Through the purchase of a fraction of its future sales, businesses can obtain financing from MCA lenders. Until the debt is fully paid off, a lender will take a cut of the daily sales of the business.

What is Bad Credit?

Bad credit refers to a low credit score or a history of missed or late payments.

 Credit scores range from 300 to 850, with a higher score indicating better creditworthiness. A credit score below 600 is generally considered poor or bad credit. 

A history of missed or late payments, defaulting on loans, or having high levels of debt can all contribute to a low credit score.

Businesses with bad credit may have difficulty obtaining finance from traditional lenders such as banks or credit unions. Lenders view businesses with bad credit as higher risk and may be less willing to lend.

This can be particularly challenging for small businesses that rely on external funding to grow and expand.

Merchant Cash Advance for Businesses with Bad Credit

Merchant cash advance (MCA) providers may be willing to lend to businesses with bad credit, but they often charge higher fees with interest rates to offset the risk.

MCA is a financing option that provides businesses with cash in exchange for a percentage of their future sales.

MCA providers take a percentage of the business’s daily credit card sales until the advance is paid off.

Case Study – Bad Funding with Little to No Credit

‘Bake & Mess’ bakery is a small business that has been operating for three years. The bakery specializes in baked goods and coffee. The business has been struggling to maintain consistent cash flow, resulting in poor credit scores and limited funding. Ms. Brown, the owner of ‘Bake & Mess’, has tried traditional lending options but has been rejected due to her poor credit score.

Ms. Brown heard about MCA and decided to explore this option. She reached out to several MCA providers but soon realized that bad funding and poor credit score made it difficult to secure a loan. The MCA providers that did offer her an advance offered unfavorable terms, with high fees and interest rates that would have made it impossible for ‘Bake & Mess’ to repay the loan.

Challenges Faced by ‘Bake & Mess’

Businesses with poor credit scores and limited funding often face many challenges when seeking finance. These challenges can include the following events.

Higher Fees and Interest Rates

MCA providers often offer higher fees and interest rates to businesses with poor credit scores and limited funding.

They do so to reduce their risks since businesses with poor financial histories have a higher chance of defaulting on their payments.

Hesitancy from MCA Providers

MCA providers often hesitate to lend money to businesses with bad credit scores and limited funding.

Their reluctance is understandable, as MCA providers take on high risks by investing in businesses with poor financial histories.

Legal Action in the Event of Default

MCA providers may be more likely to pursue legal action in the event of a default.

This can be particularly damaging to businesses with limited resources, as legal fees can quickly accumulate.

Alternatives to Merchant Cash Advance

While MCA may be a viable option for businesses with bad credit and funding, it’s important to explore alternative financing schemes. These include:

Invoice Financing

Invoice financing is an option that allows businesses to obtain immediate cash by selling their unpaid invoices to a lender at a discount.

Equipment Financing

Equipment financing is a financing option that allows businesses to purchase the equipment they need by borrowing money from a lender.

The equipment purchased is usually used as collateral for the loan.

Crowdfunding

Crowdfunding is a financing option that involves raising funds from a large group of people through online platforms.

This option is particularly popular among start-ups and businesses with innovative products or services.

Work on Improving Credit Scores

While MCA may be an option for businesses with bad credit, it’s important to work on improving credit scores to qualify for more favorable financing options.

Here are some tips to help businesses improve their credit scores:

Pay Bills on Time

Late or missed payments can have a significant impact on credit scores.

Businesses should prioritize paying bills on time and consider setting up automatic payments to avoid missing payments.

Reduce Debt

High levels of debt can also impact credit scores.

Businesses should work on reducing their debt levels by paying off loans and credit card balances.

Dispute Errors on Credit Reports

Businesses should regularly review their credit reports and dispute any errors or inaccuracies.

Credit reporting agencies are required to investigate disputes within 30 days and remove any errors found.


Conclusion

While MCA may seem like an attractive option for businesses with bad credit and limited funding, it is essential to consider the risks and challenges involved. Businesses should explore all financing options, or as a merchant cash advance provider leads for MCA are qualified too.

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