Yes, in a lot of cases you can refinance your merchant cash advance if your credit score has taken a hit. There are multiple hurdles to overcome, though, so you’ll need to make sure your business has a steady revenue stream before you decide to pursue refinancing. The catch is that it may be harder to find a lender that will refinance the cash advance because it increases the risk. The lower your score is, the more likely it is to be hard to refinance. That doesn’t mean it’s impossible, though.
Most owners who end up here followed the same path. They took a merchant cash advance against future card sales to get through a slow stretch, then struggled with the payments. Loan stacking is when business owners get several cash advances to cover their first cash advance. And it’s a quick way to end up underwater in MCA debt. The more loans you get, the more likely you are to struggle to keep up.
Refinancing and consolidation often get confused or lumped together. The short answer is that refinancing is when you replace an old loan with a new loan. It is a one-for-one trade. Consolidation takes several debts, such as merchant cash advances, credit cards or term loans, and replaces them with one product. When you consolidate, you combine several cash advances into one. That way, instead of paying off multiple MCAs, you only pay off a single one.
When stacked advances have pulled your credit down, you may find that banks and traditional lenders no longer respond to your calls. That is where a bad credit business loan can come in. These loans can run from $5,000 to $1 million and are between 12 and 18 months. Typically, you’ll need to have a minimum of $8,000 per month in revenue and a credit score higher than 500. Lenders charge between 12% and 45% rates. Every loan needs to balance risk and reward, so when a borrower doesn’t meet the requirements of a good loan, you need a way to protect the lender. One way to do that is to structure the loan so the lender knows they can pay themselves back, no matter what happens. With a bad credit business loan, that usually means automatic debits from your bank account five times a month.
Another route is one larger merchant cash advance used to pay off the smaller ones. On the plus side, doing it this way makes you just one payment. That’s nice. But it is still an MCA, with typical terms of two to twelve months, rates of 24% to 49%, and amounts from $8,000 to $250,000. Probably the most important consideration here is that the size of the cash advance needs to be large enough to cover the cost of your other advances.
A short-term loan is a term loan with a repayment period of one to three years. Because the loan term is longer, the repayment is lower than the MCA. Amounts run from $15,000 to $750,000, and the interest rate is typically between 9% and 45%. The loan is deposited directly into your bank account and you are responsible for paying back your existing lenders. In other words, you’ll need to pay off your advances on your own.
What if a funder won’t let you out early? In a regular consolidation the previous lender is paid out of the proceeds from the loan so they are no longer owed any money. That isn’t always possible. Reverse consolidation is used when the previous MCA providers’ agreements forbid early payoffs or buyouts, and/or have prepayment penalties. Reverse consolidation happens when the new lender deposits money into your account to cover your existing MCA payments. The new lender withdraws a smaller amount for its own repayment. The amount of the deposit decreases as each advance is paid off, until the only outstanding debt is the reverse consolidation.
If you can get approved, the upside is real. You make one payment instead of several, and you’ll avoid the mental fatigue of constantly trying to keep up with debt repayments. Lenders tend to be flexible on timing, too. Get the payment schedule you want; daily, weekly, bi-weekly or monthly. Banks rarely allow that. Spreading the balance over a longer term lowers each payment and frees up cash to run the business. Then there is your blended rate. The blended interest rate on your debt combines the interest rates on all of your debt. It is worked out from your outstanding balances and their rates, and without that knowledge you can’t know how much you truly owe, which means you’re not looking at the full picture. Many owners are shocked by the number, and a consolidation could actually bring it down.
There is a credit angle too. Typically, MCAs don’t report to the credit bureaus. Banks and term loan lenders do, so if you consolidate into a loan and pay it off successfully, this will show up on your report and can go a long way to rebuilding your credit score. That could help you qualify for better rates later.
It can be a struggle to refinance a merchant cash advance, and even if you do, it may not be worth your time. You might not qualify at all. Make sure you meet the minimum requirements before submitting an application. That means knowing each lender’s minimum credit score and monthly revenue. A lower rate isn’t guaranteed, either. Longer terms and fees could cost more overall than paying your advances on time. If refinancing costs you more than continuing to pay your existing advances, it might not be the right decision for you. If you just roll over balances, you might fall into another cycle of debt. Another drawback is that if you can’t make your new consolidated loan, you’ll end up in the same trouble you were in before.
Before you apply, you’ll need to have some documents ready. Lenders typically ask for proof of years in business, your driver’s license and any business licenses, proof of minimum monthly revenue, credit card processing statements, property leases and proof of ownership, and a voided check. It’s a good idea to have this paperwork together before applying. Pulling it together up front is much more efficient than scrambling to provide documents when your application has been submitted. For loans over $100,000, expect requests for more.
In the end, refinancing is not a standalone solution. Consolidating your debt buys you time, but it does not eliminate your problem. Have you addressed the reason you had to take the advance in the first place? If you don’t find out, you can expect to end up back in the same situation again and again. Put a clear repayment plan together before you borrow. Before you commit to new repayments, calculate how much cash flow you need to keep things rolling on top of the new one. Again, you’d have to run the numbers for yourself. Always read the small print. Be clear about the terms of any loan. Know what you’re getting yourself into.
