Is a reverse consolidation loan a good idea for merchant cash advances?

People don’t understand how hard it is to get a loan for a small business. Most places won’t lend to you for new businesses. If you have a single blemish on your credit the application goes in the trash.

Then along comes the merchant cash advance. The funding is fast and simple. But the lender takes money out of your account every day which can squeeze your cash flow to the point where plenty of owners take out a fresh advance just to cover the last one.

One solution people turn to is the Reverse Consolidation Loan, one of the many ways to consolidate a cash advance. It’s a tricky loan. Make sure you know what it can and can’t do before you apply.

A merchant cash advance is an advance against the business’s upcoming credit card sales. The lender examines the last few months of your credit card statements to approve you, then pays you upfront based on what it estimates your credit card sales will be in the future.

Repayment is easy: an auto pay takes a percent of the card sales out each day, so you like that. And that’s the trap: it’s too easy to bite off more than you can chew.

Merchant cash advances stack up. The reason? The card sales dry up, then something like a big customer who usually pays you by card chooses to send you a check instead, so you take a second advance to pay for the first.

Reverse Consolidation Loan

Use it to consolidate debt you can’t break out of early (and would pay a penalty for doing so) or very expensive debt.

Many lenders charge you a prepayment penalty because they lock their profit in when they approve you. They lock in the money in interest and fees, too. So if you prepay the loan, you could still owe the lender all the interest and fees.

So you won’t save money by refinancing advances that have repayment penalties (because you still owe the other guy his interest and fees), but you will gain cashflow by a consolidation. The value of a Reverse Consolidation Loan is cash flow, fewer payments, more cash each week, not savings.

Every loan has advantages and disadvantages. Look into both sides before you borrow. A loan can change the way things work at your business. Rushing into borrowing might be part of what got you where you are. Now’s the time to take your time.

The first upside to a Reverse Consolidation Loan is a lot fewer payments. The new lender will deposit $5,000 every Monday, for example, which pays for the daily MCA debits. You only have to make payments to one lender. That takes a lot of the stress out of budgeting.

The second upside is having more cash for the business. So, say $5,000 comes in every Monday. You pay your merchant cash advances every day, and say they’re a total of $3,000. The $5,000 pays your debits. Now, you’re left with $2,000 for the operations.

This loan can also work as a bridge to better financing. If your personal score is too low for a loan, or your business is too young, the better products are locked off. This gets you to where you can qualify for them.

Debt with an early payoff penalty feels like a jail. This loan can give you some relief without having to pay those penalties.

This Isn’t a Reduction in Total Debt

The downside: this isn’t a reduction in total debt. A consolidation doesn’t erase debt, it only helps you manage it. You didn’t pay off a thing, and your total debt didn’t get lower. Instead, you tacked on new debt, on top of your cash advances.

You free up cash by extending the term. Let’s say you have a debt of $5,000. You pay $1,000 a month for five months. Now, extend the term to ten months, the monthly payment is $500. If you pay $500 a month, now you free up $500 to put into the business. But you stay in debt longer.

This loan can also raise your overall debt cost. If you have a debt of $5,000 and extend it to ten months, that’s five extra months of interest. And once the cash advances are paid off, you’re still in debt to the lender.

Another drawback is that you can owe money you never received. A term loan pays out the entire amount upfront. This loan makes one deposit in your account each week. If you default, you may owe the full amount of the loan, meaning the money the lender has paid to you and the part that they haven’t yet.

So, here’s how that works out: imagine you’ve gotten $20,000 of your $50,000 loan; the bank account that you make your payments from dips too low on two days and that counts as a default; now the lender can come and sue you for $50,000 plus penalties; but that doesn’t seem fair.

Another Way Out of Your MCAs

Get a short term business loan. It could be better for you than the Reverse Consolidation Loan because it pays all your MCAs off at once. It works sort of like the consolidation: the short term business loan pays off the MCAs so you have one payment to make. Unfortunately, they might have prepayment penalties.

It makes sense for you to pay over a longer period. Payments will be lower. Typically the terms are 1-3 years. The interest rates go from 9% to 45%. The amounts can be from $15,000 to $750,000.

A reverse consolidation loan is useful to dodge an early payoff penalty, but it has many downsides. The downsides: the lender can sue you for all of the loan if you breach the terms.

Another option is a working capital loan, which you use to settle your MCA debt. But you still get extra working capital to put into the business. Terms of one to three years usually apply. The rates are 9 to 45 percent. You can borrow $10,000 to $1 million. The minimum credit score can be as low as 650.

Another way out of your MCAs is to take out a bigger MCA that can pay off the old ones. Then all of a sudden you just have one payment to worry about. That term will probably be a little bit longer, which means your payments are a little bit smaller, and that frees up money to put back into the business.

The terms on a merchant cash advance are two months to a year. Rates are 24 to 49 percent. Borrowers can take $8,000 to $250,000. You may qualify with a credit score as low as 500.

Merchant cash advances can damage your credit score, and you may get refused by banks. A bad credit business loan is one option to consolidate the merchant cash advances and keep your credit from sinking even lower.

Borrowers can apply for $5,000 to $1 million for two to eighteen months. A business needs $8,000 in monthly revenue and credit scores higher than 500. The rates are from 12% to 45%, and the lenders take their money five times a month automatically out of the checking account.