You have multiple MCAs and the withdrawals are speeding up. You’re paying high rates and fees, maybe even falling behind on your payments. The monthly pressure is a mess. You’re wondering how to stop the bleeding. And who’s going to take on that debt, anyway?
First, a quick reminder of what a merchant cash advance is so we’re all on the same page. A merchant cash advance (MCA) is not a loan. When a business receives a cash advance, the owner usually gets the money in a lump sum up front. Then the funding provider takes a percentage of the debit and credit card sales, either daily or weekly, until the advance is paid in full plus a fee. MCA cost is measured with a factor rate, which is often between 1.1 and 1.5. Providers may also charge an administration or underwriting fee, too. When expressed as an APR, that cost can be as high as 350%. You have to pay it back in 3-18 months.
It usually starts innocently enough. A small business owner takes an MCA to bridge a slow period. The owner then has trouble paying back the advance and takes out another. A second MCA to pay off the first is called stacking. Now the original owner is responsible for multiple advances with their own repayment schedules and factor rates. Stacking raises the costs and makes an already tight situation even more challenging.
With consolidation, you get multiple MCAs paid off by one new loan. One debt balance and one payment, usually monthly. Ideally, the new consolidated loan comes at a lower rate than the average of your existing advances. Some lenders buy you out, and pay off your advances directly. Others give you the money and you have to pay off the MCAs yourself. (Don’t confuse this with refinancing. Refinancing means replacing one MCA with a new MCA or term loan. Consolidation means combining multiple MCAs into one loan.)
The Main Options
So who qualifies? That depends on which kind of lender you go to. MCA providers typically do not look much at your length of time in business or your credit score. Instead, they want to see ongoing revenue. Because of this, an MCA is usually easier to obtain than another form of financing. Banks and the SBA are a different story. By the time the small business owner hits the point of multiple merchant cash advances, it’s likely because the business doesn’t have perfect credit. And that means they may not qualify for other types of loans, either.
Here is how the main options line up, and the kind of business owner each one is likely to approve.
The new, bigger MCA. If you don’t have the best credit and can’t qualify for other types of loans, a new and bigger MCA might be your only option. Then you only have one debt. The term is shorter, between a few months and 3 years.
The online lender. If your credit isn’t amazing, you might not qualify for a term loan with a major bank or with the SBA. But an online lender might give you a loan at a rate lower than what you’re paying on your MCAs. The terms are longer, which means lower monthly payments but more money in interest by the end.
Then there are SBA loans, such as the 7(a). SBA loans can consolidate business debt approved by the lender, if you qualify. You could have a term of up to 25 years. The rates are some of the lowest you can get.
The bank loan. Have you established any business or personal credit since taking out your MCAs? If so, then a bank loan might be your way out of this mess. It’ll typically provide a lower rate and a longer term. That’s who is likely to approve you.
The Cost of Consolidation
Getting approved, though, is only half the question. Are you ready to take the next step? Well first let’s make sure you can survive it. First, are there prepayment penalties? Check the terms of your MCA agreements. If there is a penalty to pay off the debt, will that eat up a lot of the savings in your consolidated loan? If so, that could be a deal breaker. Second, are there upfront fees for the new loan? That, too, eats into your savings. If the total debt does not drop very much, this consolidation may not be worth it. If the cost of consolidation outweighs your total debt relief, hold off until you can qualify for a better deal.
A shorter term means bigger payments. A longer term means lower monthly payments, but you will end up paying more over time. And a high fee could wipe out the advantage. When you’re in a tight spot, though, consolidating to gain more cash flow could be a warning sign of deeper financial problems. Doing that could also dig you further into a hole of debt.
What happens if you don’t repay an MCA? This can get nasty fast. If you don’t pay it back, the lender could raise the amount they withdraw from your business account. If you don’t pay them, they could freeze your business accounts and file a lawsuit against you. You could lose personal and business assets. Your business and personal credit could take a beating as well.
So who qualifies? The real question is whether you can qualify for a lower interest rate than your current MCA agreements. And whether your business will survive the consolidation. The answer, more than likely, depends on whether you can address the behaviors that put you in financial danger to begin with.
