For a lot of business owners, stacks are the result of desperation. After failing to secure a traditional loan at the bank, you turn to a merchant cash advance provider. Soon after, you need cash to cover an expense, and turn to another cash advance to pay the first. Before you know it, you’re buried in MCAs. This begs a question: can stacked MCAs be consolidated or refinanced? The short answer is yes, but only if the numbers work. The longer answer is a bit more nuanced.
Start with what you’re actually carrying. A merchant cash advance is an advance on future sales, not a loan. At its most basic, it’s a lump sum of cash in exchange for an ongoing cut of your daily sales. Unlike a loan where you return your principal plus interest after a set term, an MCA is tied to credit card sales. That means you repay as you earn. Almost immediately, daily repayment begins. (Some funders take it weekly instead.) The amount collected each day is a percentage of your daily credit card sales. That means it’s not static; it fluctuates. The busier you are, the faster you pay. Repayment usually runs anywhere from 3 to 18 months.
The price is quoted as a factor rate rather than an interest rate. The factor rate itself gives you the grand total on your debt. If you’re offered a $50,000 advance with a 1.5 factor, that means you owe $75,000 to clear your debt. Factor rates usually range between 1.1 and 1.5, and that figure leaves out any administrative or underwriting fees the funder adds on top. Convert the rate and fees into an APR and some advances come out as high as 350%. Remember, MCA companies are in business to make a profit, so you should expect their fees and rates to be high.
It’s easy to get behind once your sales slack. After some time, you find yourself having to take out another MCA to cover the balance. Then another one. Or a third. Each one has its own factor rate, its own fees and its own payment schedule. That is what people mean by stacking, and stacked merchant cash advances are a lot to juggle. Because MCAs are repaid as you earn, getting stacked MCAs significantly reduces your cash flow. The cycle repeats until you have unmanageable stacks.
A word on vocabulary. When you refinance a merchant cash advance, you’re getting a new MCA to repay an old MCA. When you consolidate, you’re repaying multiple old MCAs with a new MCA. Either way, the new money can also be a term loan or other business loan. With a stack, consolidation is what you’re after. When a new lender pays off your existing advances, you just go from repaying multiple payments to repaying one. When you consolidate, the goal is to save money. Stack debtors consolidate to survive.
Refinancing and consolidating stack debt can absolutely work, but it comes with a catch. Lenders handle it differently. Some buy out your advances and pay the funders directly; others lend you the money and leave the payoffs to you. If your credit is still weak, the likeliest source is a new, larger MCA. If you can get approval for the advance that consolidates all of your existing advances, ideally on better terms, expect a short repayment period, somewhere between a few months and three years. An online lender is another route if your credit isn’t excellent; rates may be lower than an MCA’s and terms longer. Banks also offer consolidation loans, but the low interest rates come with strict approval criteria. If your business or personal credit has improved since you took the advances, you might be eligible for a business loan at a lower rate and a longer term. SBA loans, such as the 7(a) program, can consolidate business debt your lender approves, carry some of the lowest rates available to any business and run as long as 25 years. Unfortunately, if you are a small-business owner trying to find an affordable loan, you are not always lucky enough to be able to qualify for SBA backing.
So, before you consolidate your advances, ask yourself: What is the benefit of consolidating? What is the cost of consolidating? Refinancing any product or service is going to cost you. Do the math upfront: how much are you paying already, and how much will you save after refinancing? Ask each funder whether it charges a penalty for paying off early, and ask the new lender about upfront fees. Inquire about all the fees, hidden or otherwise. If your total debt barely goes down once all of that is counted, the new loan probably isn’t worth it, because consolidation only works when your new lender charges you less. If they don’t, then you end up worse off than before. And it’s vital that you don’t get drawn in by a sales pitch.
Then look at the term. A shorter repayment period means your monthly payments will be higher. A longer one means lower daily or weekly repayments but more interest paid overall. This can be a lifesaver if you’re hungry for liquidity, but lead to a death by a thousand cuts if it’s not managed. Think in terms of cash flow, not profit margin. How will your payments affect your business?
High fees can cancel out the benefit of combining advances, and if you’re consolidating just to keep cash moving, that may point to deeper problems that more debt could make worse. Taking on more debt to pay for everything doesn’t address the underlying problem that caused the stacked MCAs in the first place. But cash flow isn’t a cure for debt. Neither is a lower monthly payment. The true question isn’t whether an MCA has to be consolidated or refinanced, but why it became a necessity.
Doing nothing isn’t safe either. If you stop paying, a funder may raise its withdrawals, freeze your bank accounts or take legal action, and your personal and business assets could be on the line. Your credit score can suffer as well, which narrows your options later. Each day you delay becomes a day you’re strapped for cash.
So yes, you can refinance stacked MCA debt. But only if the new financing checks two boxes. First, the fees and rates on the new financing need to be lower than the old financing. Second, the repayment schedule needs to support your business. Repaying one, large debt is easier than keeping track of multiple debts. But when two, three, or four stacked MCAs start eating away at every corner of your finances, it’s time to take the next step: run the numbers, compare offers and choose the path that actually leaves your business better off.
