Merchant cash advances are designed to be confusing. Unsurprisingly, 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 result in enormous 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 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, your projected future revenue 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 rather than an interest 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 their cash flow crunched. In fact, it’s common to take out another MCA—even multiple positions—to make up for this revenue loss (that’s known as MCA stacking). However, this only makes the problem worse.
One potential solution 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 paid to you in weekly installments from a reverse consolidation lender. The payment to your bank account is enough to cover your MCA payments for that week. Then, you will pay the reverse consolidation provider at the end of the week. 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 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. The reverse consolidation funder covers your existing MCA payments, which are made daily. 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. 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 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 have significant drawbacks and potential negative consequences.
The amount of debt you owe increases.
Unlike traditional consolidation loans, an MCA reverse consolidation doesn’t reduce the amount you owe. It increases your overall debt load. You will still be obligated to pay existing MCA lenders 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, resulting in a lawsuit 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 incredibly high.
Like a traditional MCA, reverse consolidation fees 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 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 need cash to keep your business going but struggle 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 them 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 who are inexperienced in handling these complex business transactions.
