Are you the business owner who’s taken two or three merchant cash advances (MCAs) at different times? Each one probably has its own factor rate and fees, some of which might be really high. Each one also has its own payment schedule. MCA consolidation can roll them all into one, and in theory it can lower the total in fees and interest you pay. But before you apply, you have to understand what consolidation lenders are looking for, and that can vary depending on the type of lender.
An MCA (merchant cash advance) isn’t a loan, it’s an advance on future sales. When you get an MCA, you get a lump sum and the provider takes a daily or weekly cut of your debit and credit card sales until the advance is repaid. Unlike traditional lenders, MCA providers don’t care a ton about credit scores or years in business, they care about revenue. That means you might be able to get money you wouldn’t qualify for elsewhere.
If an owner has to take out a second MCA to repay the first one, it’s called loan stacking, and now they have two or more repayment schedules to manage, each with its own factor rates and amounts, which adds up to expensive loans. Factor rates can range from 1.1 to 1.5 and, depending on the terms, fees can be expensive, too. Calculated as an annual percentage rate (APR), those loan costs can range as high as 350%. It’s hard to keep track of when an advance has been paid back, as each one can differ. But when all those advances add up, you have to figure out how many total dollars you have to repay.
A consolidation loan pays off your existing MCAs, and from then on you make one (often monthly) payment to the consolidation lender. The lenders do this in different ways. Some will buy out your advances and pay them off themselves. Others will lend you the money and have you pay the existing MCAs yourself. Ideally, the new loan will have a lower rate than the average of the advances you’re paying. Who will actually do that for you, and what they want to see first, comes down to four kinds of lenders.
The first type of consolidation lender offers a new, larger merchant cash advance (MCA) to pay off your existing MCAs. If you have several MCAs, your credit probably isn’t great and you may not qualify for any other loan, so this is a likely scenario. Like any MCA funder, this new consolidation funder doesn’t look much at your credit score or time in business, but at revenue. Fingers crossed you get better terms this time around, but expect a short repayment period, somewhere from a few months to three years.
The second option is an online lender. If your credit isn’t top-notch, this might be a way in. The rates may be lower than an MCA and the repayment term can be longer. A longer term lowers the monthly payment but means you’ll pay more interest over the life of the loan.
Third, there are SBA-backed loans, like the popular 7(a) program. You can use them to consolidate business debt, but only if the lender agrees the debt is OK and only if you qualify. Repayment terms can be as long as 25 years, and the rates are among the lowest you’ll find for business financing. The catch is qualifying, which is where the challenge usually is.
The fourth option is the traditional bank loan. It’s only realistic if you’ve had time to build up your business or personal credit since you took the MCAs. But if you have, then you may be able to get the kind of lower rate and longer repayment term that gives you some breathing room. Then you can use the loan proceeds to pay off the MCAs.
Run the Numbers the Way a Lender Would
Before you apply for a new loan, run the numbers the way a lender would. What are you paying today in interest and fees? What would a new loan actually give you, once you know what you’d qualify for? Don’t forget to factor in any upfront fees for the new loan. And if you have existing funders, ask about prepayment penalties if you wanted to pay them off early. If the new debt barely lowers your total debt load, then consolidation probably isn’t the right move. It’s important to ask yourself if the cash flow being generated is sufficient to support a “reasonable” amount of debt, based on what the business can earn.
Look at the repayment period and what the new payment will be. Shortening the term usually means your monthly payment will go up, which you might not be able to manage. Lengthening it can lower the payment, but you’ll probably end up paying more in interest. Watch out for stretching the term just to lower the payment - that can make the overall cost of the loan higher, not lower. And high fees can easily eat up any benefit. If you’re consolidating just to keep cash flowing, it may be a red flag that the business has bigger financial issues, and more debt could make those problems worse.
Consolidation and Refinancing
People mix up consolidation and refinancing all the time, but they’re not the same. Either may get you a lower rate or a new term, and both involve replacing your old deal with something new. Refinancing swaps one MCA for a new MCA, or replaces it with a small business term loan. Consolidation merges a bunch of MCAs into one new MCA or another business loan.
What happens if you stop paying an MCA? The funder may raise the withdrawal percentage, lock your business account, or sue you for the debt. You could lose business or personal assets, and your credit score may take a hit, making it harder to finance in the future. So it’s critical to choose the right financing path before things go wrong. Common red flags that it’s time to get help include having multiple MCAs, paying high rates, or falling behind on payments.
If you’re drowning, paying too much, too often, on multiple MCAs, you may be able to lower your overall costs and combine everything into one payment with a new advance or a small business loan. And which lender will say yes mostly comes down to your revenue and your credit. Do the honest math first. If it still doesn’t work, keep looking at other options.
