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Can You Refinance A Merchant Cash Advance?

Merchant cash advances (MCA) have become a very popular form of financing among business owners because they are easy to get and set up. Their convenience attracts companies that do not want to go through the traditional lending process.

The Price You Pay

There is one catch about merchant cash advance loans. The speed and convenience come at a steep price you have to pay. Owners do not realize how expensive they are when they first get one. This is because business owners tend to focus on the wrong number which is the weekly payment size. Low payments create the illusion that you have an affordable loan when in reality it might not. The costs can catch up with the business which can lead them into financial problems.

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When companies use cash advances incorrectly then the situation gets worse. When business owners are faced with high costs and escalating financial problems, some business opts to get a second cash advance. They hope the second advance will fill in the cash flow gap which is not the case.

Stacking Merchant Cash Advances

Getting the second advance is a difficult decision even if you use the second business cash advance to pay off the first one. Refinancing an MCA with another one is very costly. Keeping both advances open is even more costly and risky. Having more than one advance open is called stacking. Stacking can lead to financial failure.

An Expensive Refinancing Option…

Paying off a conventional (amortized) loan early usually offers savings. The size of the savings is usually proportional to how early you pay off the loan. This is because conventional business loans are amortized. They keep track of principal and interest separately. If you pay off the principal early, you do not have to pay any “unearned interest.”

Cash advances work differently. They lump the principal and interest fee into a single combined total payment. Your company owes the total payment and there is no advantage to paying off a cash advance early.

When you get a new cash advance to pay off an existing one, you need up paying a lot of money. Some the extra cost comes from borrowing the funds at full cost for a second time for the new lender. The additional extra costs come from having to pay interest on a new loan to pay off the interest of the old loan.

Should You Use a Merchant Cash Advance Reverse Consolidation Loan?

Merchant cash advance reverse consolidations are designed for companies that have stacked multiple cash advances. These loans offer a new cash advance that is large enough to pay off all the outstanding advances. The recurring payment will be “low” because the new advance will have a long enough term and the weekly payment will appear manageable. On the surface, it is refinancing an existing MCA with a new one.

The reverse consolidation company does not pay off the open cash advances, which would close them off. Instead, they take over your weekly payments. They make weekly payments to your lenders, while you make a single weekly payment to them.

The weekly payment to the consolidation lender is usually lower than the combination of all your open payments. However, the loan itself is usually more expensive and for a longer term. You will still be making that consolidation payment well after all the other advances are paid off.

The Dangers of Merchant Cash Advance Reverse Consolidation…

The most obvious concern is that it adds a new cash advance to your liabilities and can make your stacking problem even worse. Lenders only pay your weekly payments because it increases their rate of return and reduces their risk. This point is key. Their risk is reduced if you default on the consolidation loan.

If you decide to get a cash advance reverse consolidation, consider working with a professional first. Examine all the costs and benefits and ensure that the numbers work for your business. Lastly, ensure you understand what happens to your other lenders if you default on the consolidation loan.

The Best Ways to Get Out of a Cash Advance

The best way to get out of unmanageable cash advance debt is to refinance it with an affordable product. The following are options to choose from.

  • Business loans – business loans have competitive market rates below those of MCA’s. loan terms can be adjusted to structure a solution for your company. Most small business loans are backed by the Small Business Administration (SBA). The SBA backs these loans to make them accessible to small business owners.
  • Asset-based loans – these loans allow you to capitalize on receivables, inventory, machinery, and business-owned real estate. ABLs have a higher cost than business loans but are easier to get and are more flexible. Although more expensive than conventional loans, ABLs are still reasonably priced.

Business loans and asset-based loans provide more affordable financing options compared to merchant cash advances. They have lower interest rates and more flexible repayment terms.

With business loans, you know exactly how much interest you will pay over the full term. Paying off the loan early can save you money. Business loans also report to the credit bureaus, so making on-time payments helps improve your business credit score.

Asset-based loans allow you to leverage your business assets as collateral. This gives lenders more security so they can offer better rates and terms compared to merchant cash advances.

When refinancing a merchant cash advance, avoid getting another cash advance. This simply compounds the problem and adds more high-interest debt. Conventional business financing products are a much better option. They provide affordable payments at reasonable interest rates.

Work with a qualified business financing advisor to review your options. They can help you find the right loan or line of credit to refinance your merchant cash advance. With the right financing strategy, you can get out of expensive MCA debt and free up cash flow for your business.

How to Refinance a Merchant Cash Advance

Follow these steps to refinance a merchant cash advance into a more affordable form of financing:

  1. Review your credit report and business financials – Lenders will evaluate your creditworthiness before approving a loan. Ensure all business and personal financial statements are in order.
  2. Compare financing options – Explore SBA loans, business lines of credit, equipment financing, and other products. Compare rates and terms to find the most cost-effective option.
  3. Apply with multiple lenders – Increase your chances of approval by applying with several lenders. Each lender has its own qualifying criteria.
  4. Select a new lender – Choose the lender that offers the lowest cost financing option with the most favorable terms for your business.
  5. Pay off the merchant cash advance – The new lender will pay off your existing MCA balance so you have just one loan payment.
  6. Improve cash flow – With more affordable payments, you will free up capital to reinvest in business growth and operations.

The most important step is finding a lender that offers better rates and terms than your expensive merchant cash advance. This can potentially save tens of thousands of dollars in interest charges.

A good financing advisor can help you through this entire process. They have relationships with a variety of lenders and know how to secure the most competitive financing offer. This simplifies the application process and ensures you end up with the right business loan or line of credit.

Benefits of Refinancing a Merchant Cash Advance

Here are some of the top benefits of refinancing a merchant cash advance into a more conventional business loan:

  • Lower interest rates – Business loans typically have rates from 5% to 30%. MCA rates often exceed 50% or more.
  • Fixed regular payments – Loans have even monthly payments. MCA payments fluctuate based on credit card receivables.
  • No daily debits from bank account – MCA lenders take a percentage of daily credit card sales. Loans have set monthly payments.
  • Improved cash flow – More affordable payments free up capital to reinvest in the business.
  • Pay off principal – Loan payments reduce the principal balance. MCA payments only go toward fees and interest.
  • Build business credit – Making timely loan payments helps establish business credit history.
  • Tax benefits – Loan interest may be tax deductible. MCA costs are not tax deductible.

A conventional small business loan or line of credit can provide huge savings compared to a merchant cash advance. You get better rates, predictable payments, and an opportunity to build credit. This leads to lower costs and improved cash flow.

Risks of Refinancing Merchant Cash Advances

While refinancing into a business loan is usually the best option, there are some potential downsides to consider:

  • Loan denial – If your credit or financials are weak, you may not qualify for a loan.
  • Upfront costs – Loans may require collateral and have origination fees.
  • Inflexible terms – Loans have fixed repayment periods. MCA terms adjust based on card receivables.
  • Credit impact – Defaulting on a loan can severely damage your credit rating.
  • Prepayment penalties – Some loans charge fees if you pay off early.

To mitigate these risks, work with an experienced business financing advisor. They can help you improve any deficiencies in your application and match you with lenders most likely to approve your loan request.

While loans are less flexible than merchant cash advances, the interest savings and other benefits often outweigh this concern. And for companies struggling with cash flow due to expensive MCA payments, the lower regular payments a loan provides can be a lifesaver.

Alternatives to Refinancing Merchant Cash Advances

If you are unable to qualify for a loan to refinance your MCA, here are a couple alternative options:

Debt Consolidation

Debt consolidation combines multiple debts into a single new loan. This can help simplify payments and lower interest costs. You can consolidate credit cards, loans, and merchant cash advances into one affordable monthly payment.

Debt Settlement

With debt settlement, a company negotiates directly with your MCA lender to reduce the amount owed. This usually requires coming up with a lump-sum payment, such as borrowing from friends and family. The MCA lender agrees to accept the smaller payment as payment in full.

Debt Management Plan

A credit counseling agency can set up a debt management plan with your creditors. This consolidates payments and often reduces interest rates. They help negotiate lower monthly payments and get creditors to waive fees.

These options provide alternatives if you are not approved for a small business loan. They can help negotiate down high MCA balances and simplify payments. However, the interest savings may not be as significant as refinancing with a conventional loan.

Key Takeaways

  • Refinancing merchant cash advances into a business loan usually provides the lowest cost option.
  • Compare interest rates, terms, and fees across lenders to find the best financing offer.
  • Work with an advisor to improve your chances of loan approval.
  • Consolidation, settlement, and debt management are alternatives if you cannot qualify for a loan.
  • Avoid the high cost of merchant cash advances by securing the right business financing early.

With the right refinancing strategy, you can potentially save tens of thousands of dollars in interest and free up capital for business growth. Compare all your options and work with a financing expert to ensure you secure the best rates and terms.

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