A lot of small business owners take out one or more merchant cash advances for quick access to funds to close a cash flow gap. Unfortunately, once you start repaying, the frequent withdrawals and high fees can put a lot of strain on revenue. At some point it becomes very hard to keep up with those payments while still being able to cover expenses to run the business. That is when you may hear about reverse consolidation as a way out. It might help you get back on track. But depending on how bad the situation is, other options might be safer for you in the long run. Which raises the real question: is it actually debt relief?
A reverse consolidation works differently than a regular MCA consolidation. With reverse consolidation, you borrow from a specialized lender who provides the money you need to keep making your existing MCA payments. Your terms with the reverse consolidation lender stretch well beyond the terms of your current MCAs. That brings your weekly payments down to a more affordable level, but increases your total debt. Regular MCA consolidation is different: you borrow a single new loan that pays off all the existing debt, just like other types of debt consolidation.
A reverse consolidation lender will ask for your business financials, details on all your outstanding MCAs, and other documents when you apply. They’ll either approve you or not. If they do, you’ll receive weekly deposits to cover your daily or weekly MCA payments, while paying the lender less each week than you’re getting from them. As you pay off your MCAs, the deposits will start to decrease, and so will the amount you pay the reverse consolidation lender.
The businesses that the reverse consolidation benefits most are businesses that are on the edge of defaulting on an MCA repayment and possibly heading toward legal action. It brings them back to a position where they can make the payments to the MCA funder again and give them extra time. The difference between what you pay to the MCA funder and what you pay the reverse consolidation lender is money that you can take and put back into operating costs or expansion. Extra time is priceless, and for a business that has the opportunity and the ability to get stable again, it is particularly valuable.
A Riskier Financial Decision
For many businesses, a reverse consolidation is a riskier financial decision than the MCAs themselves. Not only will reverse consolidating add to the amount of debt you owe to service your business, it can also stretch out that debt and effectively increase the final cost of that debt. Reverse consolidating can also expose you to the hefty, unregulated factor rates. Reverse consolidating can limit your eligibility for other forms of financing. There may also be origination fees and early-payment penalties associated with reverse consolidating. Should you default on your loan, both your MCA funders and your reverse consolidation lender can take legal action against you.
So is it debt relief? Honestly, a reverse consolidation is not debt relief in the way we like to talk about the term around here at Delancey Street - you’re not reducing how much you owe. You’re adding to it, by taking out another loan. Plus, it’s over a longer time. And we’re a business debt settlement company; our senior advisors negotiate with funders and lenders for less than the full balance you owe, and we do not sell you another loan.
Better Alternatives
If you are trying to juggle MCA payments while keeping your business running, a reverse consolidation may not be your only option. It’s not always easy to escape an MCA but it can be done. One option you can try is negotiating an extension of the payment period, giving yourself time to get more money. Another way you could try is renegotiating the debt with your funder. We can tell you through a free and confidential first consultation if it’s realistic to negotiate the deal and when we see a cheaper option for you or someone better to talk to (such as bankruptcy attorneys), we tell you that on the first call.
Alternatively, if you pay off your MCA and still find yourself in need of funding, there are other solutions that involve less risk. Invoice factoring can help you get immediate cash that is tied up in unpaid invoices. With invoice factoring a factoring company buys unpaid invoices from your business, paying you 80 to 90 percent of the invoice amount up front and handling collection. Once your customer pays the factoring company you receive the remaining amount due minus the cost of factoring (which ranges from 0.75 to 3.50 percent). Unlike merchant cash advances, invoice factoring is not a loan. It is selling your accounts receivable and thus does not involve any debt.
An SBA loan is actually guaranteed by the Small Business Administration. These come with lower interest rates, more favorable longer terms, and easier monthly payments. However, the application process can be time consuming since it takes a lot of paperwork to get approved. Also, you’ll first need to use the SBA loan money your business receives to pay off your MCA debt. Term loans, similar to MCAs, have fixed repayment terms. But the risk is typically less, as your payments are not linked to your revenue. Term loans can be good for larger expenses that you have planned out. It can be a short-term loan, which may be the more common type of term loan for small business owners, or a longer-term one.
A reverse consolidation can work as a short-term fix but it’s not debt relief. Better alternatives may offer similar relief without further destabilizing a struggling business. If your company is constantly waiting on clients to pay, invoice factoring can unlock the capital tied up in your receivables while costing only a small percentage of your profits. And if the debt itself is the problem, talk to us before you sign anything new. Our fee is one percentage of the total enrolled debt, quoted in writing before any work begins.
