When a business has four merchant cash advances pulling money out of its account, some every day and some every week, the question always comes up: can I consolidate them? If you can’t pay them all you may be looking to consolidate them. One of the most common MCA consolidation schemes is the reverse consolidation. The lending companies who offer it claim that it’s a solution for the businesses that have already stacked several MCAs. Very rarely is it. Some say it saves your business, many say it wastes your money. Before you sign one, you should know exactly what you would be getting.
A Reverse Consolidation Is a New MCA or Loan
A reverse consolidation is a new MCA or loan, offered to a business that already has several advances, to help it afford the daily or weekly payments on the ones it has. Generally, the consolidation advance is for a large amount, disbursed over a period longer than the business’s existing MCA payback term, so the business gets a weekly advance that is greater than what it owes to its current MCA lender(s). It does not lower the business’s outstanding debt or consolidate its existing MCAs. It can make the daily or weekly payments easier for a time, but effectively it is just another MCA on top of the existing debt, with a longer repayment term than most short-term MCAs.
It is a new cash advance, and you still have to pay off your previous ones. It’s not a consolidation, because they are not paying off your other advances. I must stress that it does NOT pay off your other MCAs, it does NOT consolidate them, it does NOT reduce the amount of debt you owe. You still owe all four funders every dollar you owed them before, and now you owe a fifth.
Picture how it plays out. Each week a deposit lands that is a little more than the four funders will take, so the payments clear and your bank account has money in it. It grows a little each week. You feel a great sense of relief. But you are still stuck with the old cash advances, and now you have a brand new one. Then a little while later the payments kick in again. And you are in debt again, all over again. Worse, because the amount you owe is bigger than it was before.
Reverse Consolidations Can Provide a Reprieve to a Business
To be fair, there are reasons owners sign these deals. Reverse consolidations can provide a reprieve to a business that is being crushed by multiple daily, weekly and monthly MCA loans. First, the repayment term is extended. Which means payments will be paid out over a longer period of time. Secondly, the infusion of capital reduces the financial pressure and, in the short term, makes the daily and weekly MCA payments more manageable – but the business is still on the hook for every single one of the payments. Thirdly, MCAs are drains on any business and difficult to escape from and the MCA lenders want to make as much money as they can off small and medium-sized businesses – a reverse consolidation can provide a short-term bridge that avoids a default. That’s nice for cash flow. The cash flow benefit is temporary. A reverse consolidation is a temporary solution to put you on life support for a while longer.
Now weigh that against what it costs. The problem with reverse consolidations is that it’s not really consolidating your loans. It’s giving you more money to make payments on the old loans, but it doesn’t pay them off or roll them into one lower payment. It doesn’t lower the amount of your debt either. Even if the new MCA times its weekly advance to coincide with your MCA payments, those MCA payments are still due as part of your contracts.
With a reverse consolidation, the business agrees to repay far more than it is ever given. It is responsible for the entire payback from day one, even though the cash is delivered in dribs and drabs week after week. A typical reverse consolidation equals 250% to 400% (or more) in interest. The payback is much longer than a normal MCA, and once the infusions are over, the business is saddled with the reverse consolidation payments. As a result, the term and the extra obligation can limit future loan options. The problem is that you’ve just added to your debt and its cost.
It Is Almost Never the Appropriate Solution for a Business
Should I do it? Probably not. While a reverse consolidation can provide the financing to prevent an immediate default, it is almost never the appropriate solution for a business. If a business has the resources to pay down an MCA, they should always do so before getting into more debt. A business struggling to keep up with multiple MCA payments who is perhaps not able to finance day-to-day business operations might benefit from a reverse consolidation, but is likely only delaying an inevitable financial demise.
So if you are not completely broke, don’t sign up for anything new and pay down advances where you can. Going from four MCAs to five is not any good. Don’t do it. A reverse consolidation just steals from Peter to pay Paul, and with four advances already on the books, it is rarely the answer. You need a professional, uninvolved third party, to look at your deals objectively.
