Can You Consolidate MCA Loans? (And Why You Might Not Want To)

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If you’re struggling with merchant cash advance (MCA) debt, you may be tempted to look into a way to consolidate MCA loans to get some relief. Merchant cash consolidation might seem like a helpful way to manage your current debt and make it out with your business intact. But these transactions can ultimately make things worse for you and your company.

Here’s what borrowers need to know about MCA debt consolidation and why it’s best to avoid it.

What Does it Mean to Consolidate MCA Loans?

Merchant cash advances can be appealing if you’re experiencing short-term cash flow problems and in need of working capital. But in the end, they’re among the most expensive forms of business financing.

As a result, it’s not uncommon for struggling business owners that have received an MCA to have trouble paying it back. To “help,” MCA providers have introduced MCA consolidation loans.

These business cash advance debt consolidation loans are long-term loans that will make your original MCA payments until it’s paid in full and effectively reduce your monthly payments to a more manageable level. But in the end, your business will spend far more in interest and fees on top of the astronomical cost of the original MCA.

As an example, let’s say that you took out a merchant cash advance of $50,000, and you’re paying an average of $600 per day to pay it back. With an MCA debt consolidation loan, the new provider deposits that $600 into your account on a daily basis to cover the payment you need to make to your original provider.

In exchange, you’ll make daily payments to the consolidation company — yes, just like the original provider requires — for anywhere from two to 10 years. Because it’s a longer term, your daily payment will be much lower, which is why merchant cash consolidation can appear to be extremely appealing on the surface.

But there are very good reasons why these small business loans should be avoided at all costs.

The Problem With MCA Debt Consolidation

There are several reasons why you shouldn’t consolidate MCA loans with essentially a new MCA loan. Here’s a quick breakdown of some of the more prominent ones.

They’re Expensive

The chance to reduce your daily payments can be an attractive proposition. But MCA debt consolidation loans can be incredibly expensive.

For starters, you’ll be assessed an origination fee on the new loan, which can range from 5% to 15% of the loan amount. That’ll likely be several thousand dollars right out of the gate. Then, you’ll need to pay interest on your daily payments. Depending on the provider and your creditworthiness, the refinance APR can range from 39% to 159%, which can be crippling, especially if you’re making daily payments over the course of several years.

And remember, you’re not saving any money on the original advance because the factor rate is set in stone. So you’re paying all of these fees and interest on top of what you’re already paying for the original loan.

Your Business May Still Bleed Out, Just More Slowly

Merchant cash advance payments can be devastating to a company’s cash flows, and adding a consolidation loan into the mix just furthers the vicious cycle of debt.

Again, the appeal of these loans is that you’ll have a lower daily payment. But lower daily payments over the course of several years can be just as crippling as higher daily payments for a few months.

In fact, these loans can ultimately be even more devastating because they make it harder to get back on your feet and fix your cash flow issues.

Personal Guarantee Requirement

As with your original MCA agreement, you’ll typically need to sign a personal guarantee to consolidate MCA loans.

This means that if your business fails to make even one payment, the provider could potentially sue you and seize your personal assets to pay off the remaining balance.

They Can Be Hard to Get

While it’s not necessarily required, having good personal and business credit is best if you want a good chance of approval and a relatively favorable interest rate. Providers will also want to ensure that your cash flow is good enough to take on an extra payment.

But you wouldn’t have gotten an MCA in the first place if your cash flow was in good shape, and you definitely wouldn’t be struggling to keep up with your MCA payments if your income were adequate. As a result, you might not meet the criteria to even qualify for MCA debt consolidation.

What to Do Instead of Using an MCA Debt Consolidation Loan

If you’re searching for some form of business cash advance debt consolidation, a merchant cash advance consolidation loan likely isn’t the right fit. Here are some potential alternatives to consider instead:

Term loan

If you can qualify for a term business loan, you can spread out your payments to a monthly basis and over a longer period. Even if you have a poor credit score, it can be possible to get a term loan with some online lenders. And while they can be expensive, they’re not nearly as pricey as MCA debt consolidation loans.

Line of credit

Lines of credit can be appealing because you only have to make interest payments during the initial draw period, which can last for 12 to 24 months or even longer in some cases. After that, you’ll make fixed monthly payments over the repayment period. While lines of credit can be expensive, especially if your credit history isn’t in great shape, that initial interest-only payment period can give you the time to get back on your feet financially.

Settle the debt

If your situation is dire, it’s possible to settle your MCA debt through an attorney. With this approach, you pay a fixed fee in exchange for a law firm to negotiate on your behalf. The attorney will also take over all communications with your MCA provider, so you don’t have to deal with them directly. Depending on the situation, you could end up cutting your debt significantly and starting over with a clean slate.

File bankruptcy

If your financial situation is so bad that even paying toward a settlement isn’t feasible, you may consider filing bankruptcy. Of course, because a personal guarantee might be attached to your MCA agreement, the process can be tricky, so it’s best to consult with an attorney before you proceed.

Take your time to consider all of your options before you decide how to proceed with your MCA debt.

The Bottom Line

Merchant cash advances can be predatory forms of financing for small businesses. But if you want to consolidate MCA loans with another MCA loan, you may simply be delaying the inevitable.

Take a look at other loan options to see if you might be able to qualify for a term loan or line of credit that won’t put you out of business. If your situation is bad enough that settlement or bankruptcy are on the table, consult with an attorney to determine what the best course of action is and how to protect your business and yourself from potential legal trouble with your MCA providers.

The process likely won’t be an easy one, but it can help you avoid even worse consequences that can come with merchant cash advance debt consolidation. If you’re struggling with a merchant cash advance, contact Tayne Law Group at (866) 890-7337, or fill out our short contact form, and we’ll respond as soon as possible. 

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