Owners want to know how much consolidation costs. We see this question a lot. As you can probably guess, MCA consolidation is more complicated than your own factor rate and factor cost. When searching for an answer to this question, there are a couple things you might have come across: factor rate, payment amount, and so on. They give you some insights into costs, but there’s another common hidden cost that you need to be careful with: double dipping. This common practice can cost you tens of thousands of dollars over the lifespan of a financing relationship with an ill-fitting lender or cash advance provider.
Double dipping is often referred to as ”interest on interest,” “fees on fees,” or ”interest acceleration.” This charging practice is quite common in the industry, especially when it comes to short-to-medium term loans and cash advances. In the fast and fancy world of small business financing and lending, a customer can be asked to pay twice for the exact same dollars in a refinance or renewal. Here is how it works. It’s when an owner refinances with the current funding provider. The provider takes the proceeds of the new loan or advance to pay off the balance of the old contract, including unpaid and un-accrued interest or fees. The trick is that the business pays twice for the exact same money. Once you have a clear idea of what double dipping means in practice, you can see why it matters so much to the overall cost of capital at renewal. Ideally, the owner knows whether a provider double dips before the first loan or advance is signed.
Unless you’re a finance genius, you might not even be aware of the double dipping. The example below uses a loan instead of an advance. A loan has a fixed term and you hear about interest all the time so it’s easy to see the double dipping. Double dipping can occur with just about any cash advance. And advances can be more expensive than a loan. So your exposure to double dipping can be even more pronounced with an advance than it is with a standard business loan.
Say you borrow $100,000 and agree to pay back $130,000. Let’s say you make weekly payments of $2,500 for 12 months. Most lenders require you pay down at least 50% of the loan to renew. Assume you have paid down 51% of the loan and the interest that goes with it. You have $49,000 remaining principal. You have $14,700 of interest calculated on that remaining $49,000. That $14,700 of interest is not accrued. Unless you renew or refinance, it is not yet owed. You do not pay any origination fees.
At renewal, a funder has a choice whether to double dip or not. If they double dip, they add outstanding interest charges to the new loan balance, increasing the amount of future interest. If they waive interest at renewal, they don’t add it to the new balance. In our example, the funder that double dips adds that $14,700 to your loan amount, so you’ll be paying for it twice. Once in the interest you pay on the balance going forward, and once because they’ve added it to the loan again. Since the $14,700 gets charged the same 1.30 factor rate, the total double dip cost would be $19,110. Funders that don’t double dip (waive outstanding interest at renewal) don’t charge that extra cost.
Most people assume that a longer length of loan increases the dollar cost of the double dip. This isn’t true at all - we used a 12 month loan in the above example. On a 3 month or 6 month fixed term contract the dollar cost is exactly the same. The same goes for any other term on a fixed repayment contract.
The harder part is spotting it. Most contracts won’t show you this level of detail, and very few funders explain clearly how a renewal works. Often the issue of renewal gets missed altogether. Their contracts do not always make it clear, so before you enter into any contract with a cash advance company ask them directly whether they double dip. This is especially important to ask before you take a first-time loan or advance. Ask, too, what happens if you need more capital later. You can never be too educated when it comes to any contractual dealings.
If you are already renewing or consolidating, start with the paperwork. But read it. If you don’t understand it, ask a question about it. Many who do read the fine print, may struggle to decipher its nuances. That is why the following questions matter. When closing on a new contract or consolidated purchase ask the provider to document the proceeds you will receive at closing and the payback amount, or “the purchase price,” in as much detail as possible. By asking for the most granular level possible, you should see exactly what is being added to the balance of the new agreement, what is being taken out of the proceeds, and hopefully have enough detail to identify where the interest is being calculated.
Next, confirm that the provider will extinguish the unpaid interest (sometimes called unpaid fees, factor income, contract amount, or margin income) on the old contract. It should be neither added to your new balance nor deducted from your proceeds. You can put it plainly: “Is the interest on my old contract going to be included in the new balance and deducted from the proceeds?” Another simple test is if they only refer to ”contract value”, you are probably being double dipped. Finally, ask directly: Are you able to waive all outstanding interest/fees? Only outstanding principal should be deducted from proceeds.
Business Debt Settlement
Delancey Street is a business debt settlement company. If you’re buried with MCAs and the consolidation math doesn’t work, there’s another way. Our senior debt advisors negotiate with funders and lenders for less than the full amount. We do not sell you another loan. First consultation is free and confidential. If a less expensive option exists, we tell you on the first phone call.
