Many of the owners we talk to at Delancey Street are carrying more than one merchant cash advance. Most took the first one because they needed working capital to expand their business or were unable to apply for a traditional loan because of their bad credit. As they grew their business, they accrued more and more MCAs. Now they’re trying to figure out how to pay them off. You might be tempted to seek the help of a merchant cash advance consolidation company to lower your payments. Sooner or later, someone pitches a reverse consolidation loan.
Is it a loan? Is it another advance? And which one is it? Well, depending on who you ask, it could be either. But that’s not the whole answer. A reverse consolidation loan might sound like a type of loan that allows you to consolidate your loan obligations in reverse, but that’s not exactly what they are. Instead, a reverse consolidation loan is more of an advance rather than a loan. To some extent this is a semantics question. In our opinion, the correct answer is that you are not getting a loan and are getting another advance. But the money doesn’t reduce the total you owe. The MCAs still require you to pay them exactly what you originally owed.
A merchant cash advance is an advance against your future sales. The funder looks at your last several months of cash flow, makes its best estimate of what you will sell, and then, based on that estimation, makes an advance to you. The amount and terms of the MCA are based upon its estimate of future sales. Terms run anywhere from 2 to 24 months, with 12 months being typical, and the funder usually collects by debiting your account through ACH, often every day. Stack two or three advances and those debits add up. In fact, it can end up being a huge drain on your daily cash flow.
A reverse consolidation is built on top of those advances. The new funder does not hand you one lump sum to wipe out the old balances. Instead, you sign the new paperwork, and your funder takes over your weekly payments to the existing MCAs. The purpose of a reverse consolidation is to extend the term. Typically it also serves to improve cash flow and decrease the weekly payment. That’s because it reduces the weekly payment and lets you pay the original amount over a longer period. And the lenders who originate reverse consolidation loans do not pay off your existing MCAs. Since the existing debts are not wiped out, you will continue to owe them. So, you owe one lender the reverse consolidation loan AND you have to repay your original advances. The full dollar amount of the debt is still outstanding. So while your repayment terms are extended, the dollar amount of the debt remains the same.
In an ordinary consolidation loan, the debtor applies for a loan, the amount of which will cover outstanding debts. The debtors receive the loan, use it to pay off the underlying debts, and repay the consolidation loan. It’s a different story with a reverse consolidation loan. But a reverse consolidation is not a payoff because the old loan still exists. In a sense, a reverse consolidation is a loan that might not really be a loan. Instead, it is a way to pay down underlying debts by providing you with additional time. When you get another advance, you are receiving a balance in addition to existing balances.
The name can be very misleading. A reverse consolidation is often another advance disguised as a loan. In some respects it works like one more MCA, used to simplify what you pay the funders you already have.
Reverse consolidation is popular with seasonal businesses getting through a slow stretch, or businesses that experience a downturn that brings them to a need for a reverse consolidation. For an owner facing an imminent default, stretching the payments out can be a lifesaver. For some owners, making one payment to one funder is simply easier than juggling multiple advance payments. In that way, one funder collects from one source and distributes the cash. That can make bookkeeping much easier for owners. However, that convenience comes with a cost.
The mechanics are confusing, since you now have two third-party funders to deal with. They have to communicate back and forth with each other. Nothing prevents a business from taking on more debt after getting a reverse consolidation. Obviously, you do not want to do that. If you take on additional MCAs, you will have less of your revenue to deal with the reverse consolidation. A longer repayment term on your advances can also affect your debt-to-income ratio, making it more difficult to qualify for future credit. The more loans and advances you have, the harder it becomes to pay them back. The important things are to understand what you are getting yourself into, and then figure out how to get to another option when it is time.
Our Senior Advisors Negotiate with Your Funders
That other option is what we do at Delancey Street. We are not a lender, and we do not sell another loan or another advance. Our senior advisors negotiate with your funders and lenders, stacked advances included, for less than the full balance owed. Our fee is one percentage of the total enrolled debt, quoted in writing before any work begins. The first consultation is free and confidential. If your case cannot be won, or a cheaper option exists, we will tell you on that first call, and if bankruptcy counsel is the better path, we will point you there. If the daily debits are already more than your business can carry, no wonder you’re struggling. Let us take a look.
