A merchant cash advance is a way that business owners can get cash quickly when they need it. You apply for a cash advance, and a company pays you the money up front. You pay back the advance (plus a fee) by paying the company a percentage of your debit and credit card sales. Merchant cash advances are useful if you need cash to fill a gap in your cash flow, or for any short-term expenses. You might take out a merchant cash advance if you don’t qualify for a traditional bank loan because your business is too new or your credit is too low. The trouble is that if you take out more than one MCA, you’re going to be paying a different - and possibly high - interest rate and fee structure on each, and juggling multiple payment schedules. With MCA consolidation, you get one payment and - depending on your situation - potentially lower interest and fee rates.
MCA Financing
First, the basics of the advance itself. It’s not a loan, it’s an advance on future sales. You get a lump sum. The provider doesn’t lean heavily on your credit score or how long you’ve been in business; it looks at revenue instead. That means MCA financing is a lot easier to get than a traditional bank loan. But, you’ll pay for it. The cost is determined by a factor rate, which can range from 1.1 to 1.5. Then there are additional fees that can be added that aren’t part of the factor rate. These can be administrative fees, underwriting, and more. How do you repay it? The MCA provider automatically takes a percentage of your debit and credit card sales every day or every week. They do this until it is paid off. Typical terms range from 3 to 18 months. The more sales you run, the faster it will be paid off. If you were to convert it to an APR, the rate could go as high as 350%.
Say you have an MCA and you’re struggling to make the payments. You apply for another one, and use that to pay off the first one. Now you’re stuck with multiple repayment schedules, different factor rates, and different dollar amounts owed. This is called MCA stacking. MCA consolidation is a loan that pays off your existing merchant cash advances. Instead of multiple repayment schedules, you only have one. With this loan, you generally make one monthly payment to the lender. The hope is to find a rate that is less than your average factor rate.
If you have multiple MCAs, you might consider consolidation to help streamline payments and maybe even reduce interest payments. If you’re paying high rates and fees, you could potentially reduce your total amount paid with a lower-rate consolidation loan. And if you’ve fallen behind on payments or are just struggling to make your MCA payments, that’s a huge sign that you might need to consolidate.
But before signing up for a consolidation loan, run a few checks. Check to see if you’d be charged a prepayment penalty for paying off your current MCAs early. Check if the new consolidation loan has any upfront fees you’ll have to pay that can eat up any savings. You’ll want to know what you’re currently paying and compare that to what you’d qualify for. If you factor in fees and penalty amounts, and your total debt isn’t reduced significantly, then it might not be worth it. Also, keep in mind the length of the repayment period and what your new payments will look like. If it’s a shorter repayment period, your new payments will be larger, which could be hard to make. On the other hand, if the repayment period is longer, the payments will be smaller but you’ll pay more in interest.
One risk of consolidation is the potential for you to end up paying more interest if the term is longer. Another risk is if the new loan has high upfront fees. A third risk is that if you’re consolidating MCAs just to manage cash flow, this could be a sign of deeper financial issues and adding even more debt might not be the best solution.
When the terms “consolidate” and “refinance” are used together, it can be easy to lose track of which one means what. Consolidation and refinancing are simply two ways you might be able to lower your cost and change the length of your term. Refinancing involves paying off one MCA with a new MCA or small business term loan. Consolidation is where you roll multiple MCAs into a new MCA or other business loan.
Different lenders have different approaches to consolidating MCAs. Some companies buy out your MCAs and pay them off directly. Other lenders give you the money upfront and expect you to pay off the MCAs. One route is a new, larger MCA. If you took multiple MCAs, your credit is probably not good, and you may not be eligible for other kinds of loans. A larger MCA could pay off your previous ones, hopefully, at better terms. You can expect a short payback period, ranging from a few months to three years.
Alternative online lenders are another option for business owners who don’t have the greatest credit histories. The loan might have a lower interest rate than an MCA, and the terms might be longer. The longer the term, the lower your monthly payment will be, but you’ll pay more in interest. The SBA 7(a) program can be used to consolidate business debts that are approved by your lender, assuming you are eligible. You can get up to a 25-year term. SBA rates are among the lowest of any business loan. If your business credit or personal credit has improved since you got the MCAs, you could qualify for a bank loan with a lower interest rate and longer term, then use that money to pay off your MCAs.
What if you just stop paying? You could face increased withdrawal amounts, frozen business accounts, or even legal action from the MCA provider. Both your personal and business assets may be on the line. Defaulting can also damage your credit score, affecting your future financing.
The number one reason to consolidate MCAs is for simplicity. Pay one payment instead of several payments every week or month. May also be able to lower your rate and save money over the life of the loan. Bottom line: if you’re drowning, paying too much, too often, on multiple MCAs, consolidating into a new advance or small business term loan could lower your costs and consolidate everything into one monthly payment. Do your math.
