Can Businesses With Poor Credit Access Merchant Financing?

The 547 Score That Didn't Stop Him

When David accessed his credit report, he was bracing for impact. Personal score: 547. Business history: just enough to be significant. This score summed up his life: the bankruptcy in 2019 due to his failed business, his medical bills before he had insurance, his late credit card payments during his divorce.

“He had clawed his way back in the three years since the accident, and now the food truck was doing well. It was taking in about $32,000 every month. It was Baseline,” he explained. “Business was good every day. Repeat customers were continuing to trickle in. The margins were good,” he added.

Except for 547.

Two other banks had turned down his loan applications before they ever let him finish explaining the proposal, having been prejudiced by the low score. The loan agents saw the numbers and decided to look elsewhere. David anticipated he could expect the same experience in the third year as in the first two, having to “bootstrap everything because they can't get any loan from the bank because of the credit history.”

But then his accountant mentioned a different type of funding source: merchant cash advances. One thing that was very enlightening was, “They care more about your processing volume than your credit score.” However, the doubt in David’s mind fought the need he had for the money. He decided to give it a shot anyway. He went on the Web site and uploaded his processing statements to reflect the $32,000 per month credit card sales. He waited for the usual rejection In just 27 hours, he was approved for $28,000. The underwriter certainly spent no more than two minutes focused on the 547 score, and about twenty minutes examining his processing history, revenues, and track record. "The poor credit wasn’t irrelevant, but it wasn’t a deal-breaker either."

The Credit Score Gap 

Banks & Merchant Cash Advances work under the following two different lenses of credit:

• Does this individual have a record of repaying us, even under duress, over many years?" The banks ask.
• Is there enough cash flow in this business to pay us our daily slice?” MCA lenders ask.

When David's lender gave him a 547, it meant default risk and a shut door. When an MCA broker looked at 547, it caught their attention, and then their radar locked into what really motivates their model of risk: his $32,000 a month of actual cash flow processing.

The Real Credit Thresholds

They do, though, and their minimum credit requirements aren’t anywhere near as high as they would be at other lenders:

• Below 500: “Red flags.” Recent bankruptcy, collections, or ongoing charge-offs preclude approval, except for flexible MCAs.
• Below 550: “Moderate red flags.” Late payments, below-average payment behavior, collections, or charge
• 500-580 (David’s band): Alright if cash flow is good. Past problems don’t mean much unless they still exist. Rates might be a tad higher, say 1.37 rather than 1.30, but Approval is no problem.
• 580-650: Comfort zone. The credit isn’t excellent, but it is not a deal breaker. This is based mainly on their credit volume going through instead of their reputation.
• Over 650: Strong. Could snag modestly better rates, although this is fairly limited since MCAs value cash flow over credit. David's 547 puts him in the acceptable range where his steady $32,000 a month processing volume counted heavily compared to his former credit problems.

What Really Counts?

For companies with questionable credit in consideration for a merchant financing deal, what matters most in addition to credit score? It’s the day-to-day data of the business.

• Volume of processing business: It was the clincher when David’s monthly processing volume was seen to be $32,000. This revealed his capability to pay back, since his holdback was 13%, which actually translated to $4,160 monthly.
• Revenue Stability: The fact that there are three similar levels of processing indicates stable activity. It is more important than the credit score showing events from several years ago.
• Business Experience in Time: Having a three-year business experience showed that he remained in the business. He overcame the challenges that come with startups but had credit issues.
• Existing Obligations: Since there are no MCAs now, the entire cash flow could be used for the new loan. Counter-Example: A firm with immaculate credit and two MCAs siphoning off 35% of the revenue gets denied; David has poor credit but arrives with no obligations.
• Business Track Record: The growth in revenue, expanded clientele, and increased margins indicate positive future outlook that mitigated adverse credit experiences in the past.

The Honest Answer That Helped

 When asked by the underwriter for his credit history, David was very candid:

“Why did I file for bankruptcy? I did that in 2019 following a previous business failure and a divorce. I have now rebuilt for three years making all payments on time. My current business has never had any issues with that record.” The underwriter appreciated this transparency and simply moved forward. The presence of the credit note was recognized but insufficient to close the sale.

The takeaway

Can a business with poor credit qualify for merchant financing? Yes, if “poor credit” does not mean “recent catastrophic financial chaos” and cash flow is strong.

David's 547 score would have disqualified him from traditional funding for years to come. However, his MCA approval was not impacted at all because the $32,000 monthly volume answered the relevant questions. Poor credit might shut bank doors, and raise an eyebrow or two at MCA lenders, but poor credit never closes the door if today’s processing data show that business is good, and not yesterday.