Businesses often have multiple MCAs, each with its own withdrawal schedule, amount, and funding fee. Managing these payments is stressful and time-consuming. And what happens if one of your funder’s payments gets missed? While you still have the other payment hanging over your head? That’s a whole level of stress, beyond just the total of all the payments. Consolidation is one way out. An MCA consolidation is a financial restructuring where a business combines multiple Merchant Cash Advances (MCAs) into a single new loan. The main goal is to simplify payment management, and potentially reduce the overall cost of the MCAs by lowering the rate or extending repayment terms.
Three Common Ways
There are three common ways to do it. The first is a short-term business loan. You take out a new loan, use the cash to pay off your existing MCAs, and then repay the new loan over time. That time is short, though, so this only makes sense if you can pay the loan off quickly. The second is a reverse consolidation, in which a lender gives you a loan in exchange for taking over your MCA payments. You still pay a portion of what you used to pay the funder, but your payments will be spread out over a longer period, freeing up cash in the short-term. The third is the most familiar. A debt consolidation loan is a loan that you take out in order to pay off multiple merchant cash advances. You make one monthly payment to one lender, ideally at a lower rate and on a more manageable term. The catch is that they will likely require that you meet specific credit requirements.
The process itself has a few steps. Start by pulling together the details on every advance you have: the outstanding balance, the factor rate, the proceeds amount, the repayment schedule, and any fees. Now that you have all the information on hand, it’s time to start comparing rates. Make sure to shop around for the best possible deal among lenders that offer consolidation. Be sure to compare different terms and repayment options, as well as fees, to ensure you find the best deal for your business. Then apply for pre-approval. It’s important to realize that pre-approval is not a guarantee of a loan. Once you have final approval, the lender folds your advances into a single loan and sets up a repayment plan with you that fits your cash flow.
Don’t confuse consolidation with refinancing. A consolidation takes multiple advances and combines them into one. MCA refinancing, on the other hand, refers to the process of replacing an advance with one that has a lower cost. You have to qualify for that, though, and watch for fees. And while a consolidation can make payments easier, it doesn’t always save you money and could even cost you more in the long run. Of course, it can make sense to take out a consolidation that extends the repayment period but does not lower the cost. You’d do this if you need the cash flow relief of repaying over a longer period.
Total Cost of the Consolidation Loan
MCA consolidation loans usually carry an origination fee of 5% to 15% of the amount borrowed. The fee is usually deducted from the loan proceeds, so the borrower receives less money upfront. Interest rates also tend to be high and vary by lender and term. In addition to interest, many consolidation loans come with additional fees, such as late payment fees and early repayment penalties. Make sure you factor that into your calculations.
Not every business will be approved. Lenders usually want to see that you have been in business for at least two years, that you earn above a minimum threshold, have an excellent credit history, and that you are able to repay your loan on time. You will also need to be able to make a down payment and to provide a business plan and other financial documents. These factors could mean you’ll be declined if you don’t meet all the criteria for MCA consolidation.
If you do qualify, the payoff can be real. The most obvious benefit is that it simplifies repayment. Instead of managing multiple withdrawals, you’ll have one payment to worry about. That alone should save you a lot of time and stress. A second benefit is the possible savings. If you can get a lower interest rate, you’ll be able to save money in the long run. The consolidation could also help you qualify for a lower monthly payment, making it easier to manage cash flow. Paying that one loan on time can also help your credit rating. The downsides? The process involves significant paperwork, and if your credit isn’t strong, qualifying will be harder.
Consolidating your MCA funding is not a one-size-fits-all proposition. To decide, get loan quotes, then compare the monthly payments and total interest costs of each advance to the monthly payment and total cost of the consolidation loan. If the consolidation loan is cheaper and the monthly payments are more manageable, it deserves a serious look.
Other Financing Options
If you can’t qualify, there are other options. A term loan provides a lump sum upfront, with fixed monthly payments over a set period, and its rate is usually lower than an MCA’s. A business line of credit also carries a much lower rate, but it typically requires collateral or a personal guarantee. You can also negotiate a settlement, in which you’ll make one lump sum payment to your funders in exchange for a reduction in the total amount that you owe. That usually means hiring a debt settlement company, which isn’t the cheapest route. Bankruptcy is the very last resort, and it is an extremely serious action that should never be taken lightly or as a first option. Filing can provide relief from collections, but you will see additional consequences such as long-lasting damage to your credit record.
Consolidation can save money and make your debt easier to manage, but you’ll need to weigh the pros and cons of consolidation carefully. It could also be worth exploring other financing options before you decide. Before you sign anything, make sure you understand all of the terms and conditions of any consolidation loans, including the interest rate, repayment period, and any associated fees.
