Merchant Cash Advance Reverse Consolidation: Why You Should Avoid

merchant cash advance reverse consolidation

Merchant cash advances are designed to be confusing. It’s no surprise that many small business owners who take out MCAs end up with razor thin operating margins and a seemingly endless cycle of debt. Not to mention, missing payments often results in huge fees and legal problems. One product that promises to fix this issue is a merchant cash advance reverse consolidation. Except these can be just as confusing and predatory as traditional MCAs.

So before you pursue a merchant cash advance reverse consolidation, learn how it works and how it could impact your business.

How Does a Merchant Cash Advance Work?

Small business and startup owners often face challenges when securing traditional business financing, especially if their credit isn’t great or earnings are unstable. That’s why merchant cash advances can seem attractive. Often, these advances promise upfront cash within a day or two, without lengthy or strict application processes. 

An MCA is an alternative form of short-term business financing that’s often used to supplement working capital. MCAs tend to be easier to qualify for than small business loans and other forms of commercial financing. Instead of your business and personal credit score being a heavily weighted factor in the approval process, it’s your projected future revenue that matters.

That’s because an MCA isn’t a loan, but an advance on your future receivables (usually, debit and credit card sales). The MCA provider gives you cash upfront and then takes a percentage of your daily sales, plus fees, until you repay the advance. Usually, MCAs have a short repayment period of 4-24 months. They also come with fees in the form of a factor rate, which usually ranges between 1.1 and 1.5.

What Is a Merchant Cash Advance Reverse Consolidation?

Since MCA repayment takes a chunk out of daily sales, business owners may find that their cash flow is crunched. In fact, it’s common to take out another MCA — even multiple positions — to make up for this loss of revenue (that’s known as MCA stacking). However, this only makes the problem worse.

One potential solution that exists is a merchant cash advance reverse consolidation. These work differently than a typical consolidation loan, where you take out a term loan and use the proceeds to pay off your existing debts, resulting in a single fixed, monthly payment.

Instead, an MCA reverse consolidation involves borrowing funds that are paid to you in weekly installments. The payment to your bank account is enough to cover your MCA payments for that week. Then at the end of the week, you make a payment back to the reverse consolidation provider. This payment is typically a fraction of what you owe on your existing MCAs.

In other words, a reverse consolidation doesn’t pay off your existing MCA debt. Instead, you take on additional debt to cover your existing MCA payments. The repayment period is extended out so that your payments back to the reverse consolidation provider are 25%-50% smaller than your original MCA payments. That means you continue making those payments for much longer than you would have originally.

Benefits of a Merchant Cash Advance Reverse Consolidation

As we mentioned, MCA reverse consolidation can be expensive and dangerous. That said, they do promise some benefits.

Your payments are smaller.

One of the biggest benefits of getting an MCA reverse consolidation is that you are responsible for a smaller payment. Your existing MCA payments, which are made daily, are covered by the reverse consolidation funder. All you have to worry about is one smaller weekly payment.

Your cash flow increases.

Since you’re responsible for a smaller payment, you have more cash available for operations and other costs that your business faces. In fact, you may end up with extra cash if your reverse consolidation payments are more than your MCA payments. 

For example, say your weekly reverse consolidation payment is $4,000. However, your MCA payments total $3,000 per week. That’s an extra $1,000 per week you have available to put toward additional expenses.

It buys you time.

If you’re in danger of defaulting on an MCA but you can’t qualify for a term loan or other traditional consolidation method, an MCA reverse consolidation can give you some breathing room. 

In the meantime, if you find that is not an option and still feel close to defaulting on your MCA, speak with a qualified attorney who can guide you on the repercussions of being in breach of contract with your business debt. 

Drawbacks of a Merchant Cash Advance Reverse Consolidation

Despite the perceived benefits, MCA reverse consolidations come with major drawbacks and potential negative consequences.

The amount of debt you owe increases.

Unlike traditional consolidation loans, an MCA reverse consolidation doesn’t actually reduce the amount you owe. In fact, it increases your overall debt load. You will still be obligated to pay existing MCA providers their daily payments, plus weekly payments to the reverse consolidation provider. If unforeseen circumstances cause your revenue to fall, you could default on your MCAs and/or reverse consolidation, which could result in a lawsuit being filed against you and your business.

You stay in debt longer.

A merchant cash advance reverse consolidation involves taking on new debt for a longer repayment term than your current MCA. This means continuing to be on the hook for payments even when your MCA is paid off, which takes a bite out of your cash flow.

The fees are extremely high.

Like a traditional MCA, the fees on a reverse consolidation are high. When expressed as an annual percentage rate, MCA reverse consolidation fees can reach 300% APR or more. Plus, the debt is not amortized, so you don’t save any money by paying it off early. You could even be charged early payment fees. 

Is a Merchant Cash Advance Reverse Consolidation a Good Idea?

When you’re in need of cash to keep your business going, but struggling to keep up with your existing MCA payments, a reverse consolidation might sound like a good idea. However, an MCA reverse consolidation doesn’t fix your MCA debt problem or overall cash flow challenges. Unfortunately, it only compounds it and can create many more legal headaches for you and your business. 

If you need help managing MCA debt or a reverse consolidation, call Tayne Law Group, P.C. today. We have more than 20 years of experience helping clients resolve issues related to business debts like MCAs, including lawsuits and UCC liens. Get a free, no-obligation phone consultation with our experienced and friendly staff at (866) 890-7337. Or fill out our short contact form, and we’ll respond as soon as possible. All conversations and information provided to us are confidential. We never share or sell your information or outsource our services to third parties inexperienced in handling these complex business transactions. 

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