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

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.

It is possible to consolidate MCAs; this can be a strategic move for businesses that have taken out multiple advances. This process involves taking out a new loan to pay off your existing cash advances. The goal is to secure a lower overall interest rate, reduce the daily or weekly repayment burden, and simplify your finances by having only one creditor instead of multiple.

However, it’s important to weigh your options carefully and select a consolidation loan that ultimately helps your bottom line. Here’s what businesses need to know about MCA debt consolidation.

What Does it Mean to Consolidate MCA Loans?

Consolidating MCAs means taking out a new loan to pay off multiple MCA debts. This strategy is often pursued to manage and simplify payments, as well as to improve the borrowing terms.

There are several potential benefits to consolidating MCAs:

• Simplify repayment: Instead of multiple daily or weekly payments to different MCA providers, consolidation allows a business to make a single payment. This can help in managing cash flows more efficiently.
• Reduce costs: By consolidating, a business may secure a loan with a lower interest rate compared to the high factor rates of MCAs, potentially leading to significant cost savings over time.
• Extend repayment terms: Consolidation loans can offer longer repayment periods, which can reduce the immediate financial burden by spreading payments out over a longer time.
• Improve cash flow: With potentially lower payments and extended terms, businesses can improve their cash flow, making it easier to invest in operations and growth.

Refinancing vs Consolidation

Consolidation and refinancing are both strategies used to manage and potentially improve the terms of existing MCA debt. While they share similar goals, they involve different approaches and outcomes.

The primary goal of consolidation is to combine multiple MCA debts into a single loan. This simplifies the repayment process by turning several payments into one and may offer better overall terms such as a lower interest rate or longer repayment period. Consolidation involves taking out a new loan that is used to pay off all existing MCA debts. After consolidation, the borrower is left with one loan to manage, instead of multiple.

Refinancing focuses on replacing a single MCA debt with a new loan, often with better terms such as a lower interest rate, different repayment structure, or extended repayment term. The goal can be to reduce the cost of debt or to adjust the repayment schedule to better fit the business’s cash flow. Refinancing involves taking out a new loan with the specific purpose of paying off an existing MCA loan. The business ends up with a new loan that ideally has better terms than the original MCA.

Types of Merchant Cash Advance Consolidations

When considering the consolidation of Merchant Cash Advance (MCA) debt, businesses have several options. These options vary in terms of accessibility, terms, and the potential impact on your financial situation. Here’s an overview of some common routes you might consider:

Traditional Bank Loans

Loans from traditional banks typically offer lower interest rates compared to MCAs.

• Pros: Lower interest rates; longer repayment terms.
• Cons: Stricter qualification criteria; longer application process.

SBA Loans

Small Business Administration (SBA) loans are government-backed loans that offer favorable terms.

• Pros: Competitive interest rates; long repayment terms.
• Cons: Rigorous application process; requires strong credit and financials.

Online Lenders

Online lending platforms can provide fast access to funds, often with less stringent requirements than traditional banks.

• Pros: Quick application and funding; more flexible qualifications.
• Cons: Higher interest rates than banks and SBA loans; shorter repayment terms.

Business Lines of Credit

This is a flexible form of financing where you only pay interest on the amount you draw.

• Pros: Flexible access to funds; pay interest only on what you use.
• Cons: May have higher rates than traditional loans; requires discipline to manage effectively.

MCA Debt Consolidation Companies

There are also companies that specialize in consolidating business debt, including MCA debt.

• Pros: Expertise in consolidating high-interest debt; may offer relief and restructuring advice.
• Cons: Fees for services; potential for unfavorable terms if not carefully evaluated.

Eligibility and Requirements for MCA Consolidation

Securing a consolidation loan to manage MCA debt involves meeting certain criteria set by lenders. These requirements can vary significantly depending on the lender’s policies and the type of loan. However, there are common qualifications and documents that many lenders will request when you’re applying for an MCA consolidation loan. Understanding these can help you prepare your application and increase your chances of approval:

Business Performance

Lenders typically require proof of steady and sufficient business revenue. This demonstrates your ability to repay the loan. There may be a minimum period of business operation, often at least one year, to show business stability and track record.

Credit Score

While requirements vary, a good personal and business credit score can significantly improve your chances of obtaining favorable terms. Some lenders specialize in helping businesses with lower credit scores, but this may result in less favorable terms.

Debt Service Coverage Ratio (DSCR)

Lenders may calculate your DSCR to assess your ability to repay the new loan. This ratio compares your business’s net operating income to its total debt obligations. A DSCR of greater than 1 indicates that your business generates enough income to cover its debt payments.

Legal and Financial Documentation

You will need to provide documentation, including:

• Financial statements, including profit and loss statements, balance sheets, and cash flow statements.
• Bank statements, typically the last three to six months, to verify revenue and cash flow.
• Tax returns, both personal and business, usually for the last two years.
• Current debt obligations, including details about any other loans or advances your business has.

Business Plan

Some lenders may require a detailed business plan that outlines your business model, market, operational strategy, and how you intend to use the consolidation loan to improve your financial situation.

Collateral

Depending on the lender, you might need to provide collateral to secure the loan. This could include business assets, equipment, real estate, or other valuable property.

The Problem With MCA Debt Consolidation Companies

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.

For example, let’s say 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 daily 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, so merchant cash consolidation can appear extremely appealing on the surface.

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

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, ranging 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%. This can be crippling, especially if you’re making daily payments over the course of the repayment term, which may be 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 high interest rates 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 business 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.

Alternatives to MCA Debt Consolidation Loans

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 repayment 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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