We hear from a lot of business owners struggling with their merchant cash advances. So many small businesses already have advances that the MCA companies are running out of people to sell one more advance to. Their solution was a new product, known by different names, such as MCA consolidation or reverse consolidation. Is it just another advance? Yes. It is an advance with a new name.
A reverse consolidation is when a new cash advance is given not as a lump sum, but as enough money in your business account each week to pay off the existing advances. You make a daily payment to the new consolidator (the dollar amount of which is often lower than the daily payment you’re already making) and every week the consolidator drops in enough cash to pay your existing advances. Because the term of the new advance is much longer than the term of your existing advances, the daily deduction will decrease by a small amount.
Sounds like it would provide a lot of relief, right? But you may not have heard the whole story. The word consolidation is in the product’s name. And it’s a bit misleading. A reverse consolidation does not “consolidate” anything.
For example, say you have $100,000 in merchant cash advances outstanding and you’re paying $1,150 a day. After the reverse consolidation you continue to pay that $1,150 every day. But the consolidator deposits $5,750 into your bank account once a week to pay those old MCAs until they’re all gone.
You also are paying the consolidator $500 or so every day, and you keep paying that payment for a year or more after you pay off your original advances. They are not loaning you $100,000. They are only covering the amount you need to pay off your current advances, and then adding roughly a 50% finance charge on top. That $100,000 of debt can become $200,000 the day after you sign the paperwork.
So, to cut to the chase, the answer is yes. A reverse consolidation is a new merchant cash advance, purchased from a merchant cash advance company, to pay off your existing MCAs, along with a very large finance charge. Nothing gets combined into a single payment, and the total amount you owe increases.
Locked In
The day you sign a contract that says you will pay a fixed sum every day for a number of months, you are locked in. Let’s say you currently owe $180,000. What happens if you miss a payment one month in? All it takes is for your bank balance to be too low at any point during the 12 to 18 months they will be pulling money out every day. They can hit you with enormous penalties, and the penalties can push you into default.
In the first month you may only have gotten about $20,000 from the consolidator. But they can sue you for the full amount you signed a contract for, which could be $100,000. You can end up owing money for funds you never got.
Who Is Selling This Stuff
Think about who is selling this stuff. Pretty much every company that offers these “reverse consolidations” also sells merchant cash advances. And if you’re looking at one, that’s because merchant cash advances got you into trouble in the first place. And that probably wasn’t your fault. We’ve talked to hundreds of business owners who are struggling with MCAs, and most of them say the salespeople lied to them about the rates, the terms and other key information.
Do you really believe that a company who sells the heroin of business financing is going to help you? Would you ask a drug dealer for help? All of this stuff is designed to be confusing, and by the time you figure out what’s going on, you’re already deep in the swamp. A reverse consolidation is even more confusing than the advances you’re trying to get out of.
Think about the bigger picture here. Some company sells you a confusing product. Then they sell you an even more confusing product to get you out of the first one, and they call that a consolidation even though it does not consolidate anything at all. Do you really think that’s going to help your business?
If It’s Not in the Paperwork, It Doesn’t Exist
Many owners are told something like this before they sign: after a few weeks of payments, you can convert this into a term loan. No mention of this conversion appears in the paperwork. We know of many situations where owners asked about the term loan, then got ghosted and never heard from the sales rep again. Why would a company that makes money on crushing finance charges suddenly give you a low-rate term loan with reasonable monthly payments? Make sure whatever you’re promised is in the paperwork you sign.
Plus, your total debt might almost double the day you sign. So a reverse consolidation can prevent you from getting a term loan to consolidate your MCAs, from hiring a third party to renegotiate your advances, or from using the equity in your real estate or equipment to get it all consolidated.
But before you sign, ask to see exactly how much you’ll end up paying, how long it will take to pay those daily installments, and double check to see if every “thing” the sales guy promised is actually in the contract. If it’s not in the paperwork, it doesn’t exist.
Maybe a reverse consolidation is the right product for your business. That’s a question only you can answer. But we believe it’s a bad product. Almost invariably an MCA consolidation company is offering you another advance with a new title. There’s a movie, Leaving Las Vegas, where Nicolas Cage plays a character who drinks himself to death. He dies in the end, but it worked for him. A reverse consolidation might work for you the same way. There are better ways to get out than that.
