Merchant Cash Advance Reverse Consolidations: How Do They Work?
Quick Answer: Merchant cash advance reverse consolidations are not like traditional debt consolidation products. Merchant cash advance lenders offer these to business owners as a way to cover daily or weekly payments. These often result in borrowers prolonging their payback period because the consolidation is another form of debt.
Imagine this scenario.
You are a business owner with one or more outstanding merchant cash advance debts. You find yourself struggling to make your daily payments.
You research the possibility of obtaining some type of consolidation loan product to refinance your advances to help provide cash flow relief for your business.
You come across something referred to as a reverse consolidation.
It may sound like the perfect solution to your problem. But the truth is more complicated than that. Here’s what you need to know about these products before jumping in with both feet.
What are Merchant Cash Advance Reverse Consolidations?
A reverse consolidation is effectively a different type of funding provided by merchant cash advance lenders. The funder examines your MCA debts and calculates your total daily payments on a weekly basis.
If they approve you for the consolidation, the lender will provide you with funds by depositing a certain amount into your business bank account weekly.
The amount they provide will be enough capital to cover your daily merchant cash advance payments with some extra left over. The consolidation lender will give your company approximately 20-25% more than your existing payment obligations each week.
That might sound great on the surface.
If you dig a little deeper, though, this kind of consolidation causes more harm than good.
When you accept an MCA reverse consolidation, you are allowing yourself to get deeper in debt with a higher total debt balance.
This merely prolongs your period of repayment and eats into your business’s cash flow.
Reverse consolidation is not a commonly recognized financial term.
It does not have a commonly accepted definition in the world of traditional finance or lending.
A reverse consolidation is a product created by the merchant cash advance industry. It is not something you would commonly find being offered by a traditional lending institution.
While they’re sometimes characterized as a loan, they’re more often positioned as a new advance.
MCA providers position reverse consolidations as money funded to a business owner for the purpose of helping the business owner stay current with their existing merchant cash advance payments.
The Problem with MCA Reverse Consolidations
An MCA reverse consolidation is like taking out another cash advance on top of your existing cash advance.
Effectively, with a reverse consolidation, a business owner takes on a new debt to hopefully secure additional room to make existing merchant cash advance payments.
While the reverse consolidation provides you with enough funds each week to make your normal daily merchant cash advance payments, you still have to pay it off.
You may have a certain amount left over to help you with cash flow at the end of each week (or day), but that’s not much better than where you started.
The question you must ask yourself is whether an MCA reverse consolidation would help you with your current business situation more than it would harm your business in the long run.
In almost every case, the answer is clear. There are much better options than an MCA reverse consolidation.
Here’s 1 big problem: Business owners get their reverse consolidation loan or advance funds in weekly installments and never all at once.
This means the borrower does not receive the immediate benefit of the entire amount they sought to borrow.
The lender maintains control of the purse strings, so to speak.
Our law firm has experienced multiple instances where our client’s reverse consolidations were only partially funded by the lender.
The money that was supposed to pay off the first cash advance dries up. This leaves business owners with no way to pay it back. Plus, they have the new debt from the so-called consolidation to pay back.
Are There Pros and Cons to This Option?
Short answer: the cons far outweigh the pros in MCA reverse consolidations.
There are benefits to reverse consolidation. The payments are more commonly, but not exclusively, due weekly and not daily. That’s much better than the daily factoring rates associated with most merchant cash advances.
If you handle your payments appropriately, you may have a better opportunity to more accurately budget around existing cash flow.
Another benefit is that it can afford you more time. The payment periods for reverse consolidations are longer than typical merchant cash advances. As a result, the business will have a greater opportunity to improve performance over time.
Of course, there are significant drawbacks to reverse consolidation. Here are a few of the most important ones:
- The total debt that a business owner shall be obligated to repay will increase significantly.
- Reverse consolidations come with very high costs and fees.
- There is no guarantee that the lender will fund the entire amount for the total number of weeks, as scheduled in the contract.
- Reverse consolidations are not amortized, meaning you cannot save money by paying it off early, and there are no pre-payment discounts.
With any reverse consolidation, a borrower takes on greater debt. They’re simply repaying it over a greater period. However, the repayment schedule for the reverse consolidation may not be substantially longer than the repayment period of a standard merchant cash advance.
If you are in danger of defaulting on MCA debt and you cannot qualify for a traditional loan to help you consolidate your existing debt, an MCA reverse consolidation could provide you with better temporary stability. The smaller weekly payment obligation and a longer repayment term may serve as a stopgap.
Just keep in mind that it will result in a higher overall debt load for your business.
Talk to the Merchant Cash Advance Debt Experts at Business Debt Law Group Before Applying for a Reverse Consolidation
Before you apply for a reverse consolidation as a stopgap, please contact our law firm and ask to speak to one of our qualified and experienced attorneys.
Adding another merchant cash advance on top of your existing advance may not be your only option. Instead of building a larger debt snowball, speak to someone who can help you get the relief you need.