When you take on multiple MCAs, the daily debits can start to eat away at your account, leaving less for your business. A broker may suggest consolidation, but this often doesn’t reduce the total amount you have to repay. As an MCA business owner who has gotten themselves into an MCA debt trap, the panic that you are facing is real. You would give anything, at this point, to put this nightmare behind you. You don’t care how. You just want to stop the bleeding. Then along comes the offer of relief!
Often that offer is MCA reverse consolidation. This is not the same as a debt consolidation loan, where you take on a new loan to pay off your old debts. You are looking for relief, and this will be provided, of course, at a price.
The way reverse consolidation works, you are not given a lump sum. Instead, the provider gives you money on a weekly basis. You use that money to pay your current MCA’s for that week. You pay the provider back every week, and typically the weekly payment is less than the total of the original MCA payments, so your cash flow situation improves at least in the short term. Another advantage of reverse consolidation is that it can simplify your payments. Instead of juggling several daily debits, you make one weekly payment. With smaller, more manageable payments, more money stays in your business. You can use it to cover essential operating expenses such as payroll, inventory and utilities. That extra cash can even be put towards growth, such as marketing campaigns, new equipment or expansion. For a business on the brink of default, that might be just enough to give you the breathing room to survive. I guess you can see why that deal sounds so enticing. At least the panic will stop.
Reverse Consolidation Doesn’t Actually Reduce Your Debt
What about the debt? Here is the honest answer to whether this lowers your total payback. So reverse consolidation doesn’t actually reduce your debt. You are just adding another layer of debt. While it may give you a longer repayment period, it means that you are going to be in debt for longer, which limits your ability to invest in growth. Ultimately, the total payback might even be higher. The more months you are in debt, the more weeks you will have to pay. In other words, the longer you need the new money, the more it costs you.
Even the fees on these reverse consolidation deals are usually high, and in many ways no different than MCAs. Expressed as an APR, they can sometimes reach a 300% APR or above. Furthermore, you are not guaranteed any savings for early repayment, and may even incur an early payment penalty. If all this doesn’t sound like a trap, I don’t know what does. But the offers can be so tempting.
The risks go beyond cost. High fees and factor rates, along with the added length of time in debt, can create problems for cash flow. If the business defaults, the owner risks losing assets that were used as collateral. The lender may seek to recover a loss through a personal guarantee, and the business may find it difficult to qualify for future financing. Additionally, some funding may not actually fully pay off the old MCAs as promised, and you will be left not just with the old problem, but the new problem as well. You will now have yet another payment to make. But in the end, do you really want to go deeper into debt?
If this is starting to sound like stacking, you are not wrong. Stacking piles up multiple daily payments, while reverse consolidation trades them for a single weekly one, but at the end of the day you are still borrowing more to pay the old debt. Both methods ultimately increase the total debt owed.
Before you sign anything, ask yourself a few honest questions. First, ask yourself whether you can manage the new debt. Even though the new payment is smaller, the total amount of debt will go up. Second, will your cash flow improve enough for you to invest in your operations? Finally, do you have any other options, such as traditional loans or MCA debt consolidation, that may be more sustainable in the long run? Then consider the long-term impact. Even if the weekly payments seem more manageable, is the business setting itself up for bigger problems down the road? Is this a sustainable solution, or just more of the same?
Every business situation is different, and what might work for one company could be detrimental to another. Reverse consolidation may provide temporary relief, but it could come at a significant cost. It’s crucial to fully understand how reverse consolidation works and its potential implications on your business’s long-term financial health. Always weigh all your options and seek professional advice before making any decisions.
MCA Restructuring
So what can lower the total? One option that could be a better fit is MCA restructuring. It reduces the total debt, instead of adding new debt. It’s accomplished by negotiating with the MCA provider to reduce the principal balance and factor rates, which results in an overall reduction of what you owe, not just an extension of the repayment period. As a result, you get sustainable, manageable payments without having to take out a new loan or provide collateral.
The short answer is that MCA reverse consolidation may be able to help you survive, but only for a short time. It might buy you more time, but you are borrowing more to do it, and the total cost can end up higher, not lower. If you want the number to come down, the conversation has to be about the debt itself, not just the payment schedule.
Negotiate with MCA Funders and Lenders
That kind of negotiation is the work we do at Delancey Street. Our senior advisors negotiate with MCA funders and lenders to settle for less than the full amount of debt owed. We do not sell another loan. Our fee is a single percentage of your total enrolled debt, quoted in writing before we start work. The first consultation is free and confidential; if we see a cheaper alternative or know bankruptcy counsel (including Subchapter V) is the proper solution, we’ll tell you up front. Delancey Street is attorney-founded, and was also founded by debt-relief professionals and former merchant cash advance industry executives. We primarily specialize in MCA debt (such as stacked advances), but also in SBA loans, equipment finance and lines of credit. We are not a law firm, however. If a case calls for litigation, bankruptcy, or tax work, we point clients to a vetted independent attorney.
