Do Mortgage Defaults Effect MCA Qualification?

Almost daily we receive submissions for Merchant Cash Advances from business owners that have perfect credit other than a mortgage default/severe delinquency. Many times these owners are perfect with every other payment (car notes/leases, credit card cards, utilities, etc.) and still suffer from sub-600 FICO scores. This obviously makes them ineligible for any type of bank financing.

For a multitude of reasons these merchants are walking away from their homes. During our merchant interview we hear horror stories about how they have tried to negotiate with the bank to do a loan modification or some other workout. We'll this video shows you the real story on why the banks make more money when the home owner defaults. It also reinforces what we all know, that bailouts only help Wall Street who doesn't need them and never reaches Main Street!



Here at American Finance Solutions, we welcome these clients who have good credit except for the mortgage and have a steady business. We know that they are highly unlikely to walk away from the business that they have worked so hard to build. Often we ask for back up paperwork to show that they applied for the loan mod or negotiated a short sale. If they already walked away from the property and the foreclosure is complete then usually documentation is not required. These are good credit worthy clients caught in an unfortunate situation.

If the business owner is a low-500 FICO and struggling across all credit lines, then we have to take a good hard look at the complete picture on both the personal and business side to make a credit decision.

I recently polled our competitors and about half take the same position as AFS, while the other half adhere to strict guidelines. Some require no more than 60 days down on a mortgage while others are 120 days late.

So, do mortgage defaults effect a business owners ability to qualify for an MCA? The answer is, it depends on the situation and who you apply to.

Feds Take On Small Business Lending

Ben S. Bernanke, the Federal Reserve chairman, recently encouraged banks to increase lending to small businesses. He firmly believes that small businesses are the key drivers to the US economy and where our road to economic recovery and reduced unemployment starts. Bernanke states that “while maintaining appropriate prudence” lenders should try to satisfy the needs of these small businesses because the well being of the banking system depends primarily on the banks “lending to small businesses that are well positioned to pay”. Job growth depends greatly on small businesses but it becomes difficult for these businesses to expand payroll if they do not have “sufficient access to credit” Bernanke says.

It is a known fact that that small businesses rely on financing much more than large companies. This financing help stabilize the business enough so that it increases employment, creating jobs for those who need it. Lending institutions must overcome the fear that small businesses will not pay off their debt and realize that it is needed for the economy.

Based on our application rates at AFS, we know the issue is not demand. Currently AFS is processing well over 1,000 applications per month, an all-time high. As I’ve stated before the issue now is supply of credit for small business. Bernanke further stated that lenders feel as if there is no longer a strong demand from creditworthy borrowers. He could not be further from the truth! We are seeing a dramatic rise in applications from bankable business clients with credit scores in excess of 750, two years operating history and decent business credit.

Furthermore, Fed bank presidents are contemplating the need to eventually raise interest rates. This needs to be done because of the record low interest rates now and to decrease the possibility of inflation. Doing so would constrict the supply of credit even further!

While we realize that the current state of business lending is a boom for our industry, a gradual overall increase in bank lending will benefit the entire economy. This will result in lower defaults for MCA funders and increase profitability with a stronger portfolio. The key will be capturing market share through reasonable pricing coupled with service.