There’s a particular kind of desperation that comes with owing too many merchant cash advances. The owners want a consolidation loan. They almost never get it. And into that gap step the brokers who preach the gospel of the Reverse Consolidation.
Reverse Consolidations are marketed as a lifeline of last resort but may be the worst business financing product on the market. Few owners survive one. Few understand how they work, even a lot of funders and brokers. This is the first in a series on what it is, how it works, and why merchants can’t keep up with the repayments. Later posts will show just how much brokers and funders don’t know.
A business owner gets a cash advance then another to make the first one work. Then a third. The repayments pile up and the owner gets desperate. By that point the owner is so deep that almost anything looks good. Anything.
A desperate merchant with a lot of MCAs is the perfect client for the broker, who can steer the owner to the funders that sell reverse consolidations.
That way the broker earns the biggest commission they can.
As soon as the broker signs up a client they try to stack the client. A broker earns a commission on every new advance, so the natural impulse is to help the client take out even more debt, because each new advance pays the broker.
Once no other funders will write an advance, the broker shifts pitch to a reverse consolidation.
Stacked owners ask the broker for three things. The first is a consolidation loan. That’s the dream loan that replaces all the existing debt with one payment. The second is an SBA loan. And the last is just some long-term financing that moves them out of the near-term pressure.
But the problem is simple.
Banks are hesitant to lend to small businesses, anyway, and an MCA on the bank statement makes it even harder. Very few banks lend to businesses with a lot of MCAs. The bank worries the business will take another advance and default on the bank loan. The banks won’t take the chance.
MCA companies do not make loans. They buy a share of future revenue for less than it’s worth. The people running advance companies make guesses about what the business can do. They’re not banks. Their operation is small. The companies look at bank statements over a few months and guess at what the revenue may be and take a cut of the incoming cash. Then they collect. This is fast with steep fees.
The ads say that they are direct lenders and offer consolidation. But there is no consolidation. Fund companies aren’t loan servicers. If they were, they’d be subject to more bank rules and regulations.
Fund companies can’t make a loan that consolidates the existing debt. Instead they offer one last advance and try to sell it as a consolidation tool. There is no way to consolidate the existing MCAs, but they can sell you one more.
The blunt truth: a reverse consolidation is not a consolidation.
A New MCA Laid on Top
What is a reverse consolidation?
A real consolidation loan takes all your debts and rolls them into a single loan with a longer term, lower payments, and a much easier road to pay off.
A reverse consolidation is a new MCA laid on top of the ones a merchant already has. There is no consolidation of debts, no refinancing the debt, no combining anything.
With an ordinary advance, money is in your bank account as a lump deposit. A reverse consolidation acts like a timed deposit: one drip per week, starting at a high amount to cover all your existing advance repayments plus a margin on top. The deposits arrive on a preset schedule. The size of the deposit is based on what the funders decide. And the deposit is a little smaller each time as debt is assumed to be paid off.
The brokers sound reasonable. They all say it’s consolidation. This is it: new money arriving at regular intervals, then being used to pay the old funders.
At first glance, the reverse consolidation seems like a way out of the debt. It feels like a solution. But it isn’t.
After the owner starts getting weekly drips, the fund company comes right behind and starts tapping daily. The catch in a reverse consolidation is that you repay as if you borrowed a lump sum, but you get it in pieces. The debits are set on the full amount of the advance, not just what has been deposited so far. Most owners notice too late.
Lendora Capital, LLC V. Valle Security Texas, LLC
See as an example Lendora Capital, LLC v. Valle Security Texas, LLC, pending in New York Supreme Court, Monroe County. Lendora sued the business and its owner, alleging default on a reverse consolidation.
Valle had five MCAs with Lendora and Lendbug. Valle signed a reverse consolidation with Lendora. The deal took $333,000, or 10.5% of its receivables, for a payoff of $499,167. Unlike a regular advance, the cash came in parts over 25 weeks. Lendora took debits at once, $2,495.84 per day. The deal had a limit of 200 debits.
The problem in Valle is that reverse consolidations repay daily, even as the other positions end.
The total balance on all positions, before the reverse consolidation, was $316,956.66, with $3,741.31 due a day.
The reverse consolidation contract had an ultimate payoff of $499,167. Its daily debits alone ($2,495.84) came on top.
When Valle signed the reverse consolidation, its debt jumped to $816,123.66, with daily payments up to $6,237.15.
The monthly numbers look OK in theory, but the fine-print daily debits are the real catch. A business owner’s first clue that something’s wrong is that daily debits do not fall off but stay high. In theory, weekly deposits keep the business alive while the old positions fall off. But the daily debits of $2,495.84 go on until the position is paid down.
Valle’s debt more than doubled. The business gets hit with extra daily debits. The funders see their cut rise higher than what they got in the past. And the owner gets no debt consolidation, even though it seems like they will.
Can’t Help a Struggling Business
Reverse consolidation deals can’t work. In the age of instant everything and e-cards, it doesn’t seem to make sense to get the advance over weeks, rather than a lump sum at once. The advance company paid you in pieces but wants daily payment, all at once. The basic problem is that an advance is not a loan. It’s easy to get confused, but there is no loan and no consolidation. The deal is a sale of receivables to a buyer who pays installments over time.
The main problem is that as revenue drops, a business owner needs lower payments, not more debt. The first cash infusion looks like help. After that, the daily debits start coming. The problem with selling new debt to a struggling business is that it fixes the symptoms but does not help with the disease.
The first infusion comes in. The next few weeks look manageable. The infusions pretend to be dollars that aren’t there. Weekly infusions drop but the debits stay the same. You’re back in the same trap.
After a reverse consolidation, a business has at least two options. It can keep up with the daily debits. Or it can default. Repayments on just the reverse consolidation alone is often more than a business can afford. That’s when the doors close.
The bottom line is that an owner who is already struggling can hardly survive a reverse consolidation. It’s really an advance in a new coat of paint. If the broker says the deal is a consolidation, it isn’t. Before you sign one, learn what it is.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
