When MCA Debt Consolidation Works: 5 Tests That Separate Relief From Delay

If you’re having trouble managing multiple daily payments to merchant cash advance lenders, consolidating those payments may bring some short-term relief. But that relief may come at a cost. Consolidating debt involves taking out one new loan and using the funds to pay off multiple existing loans. A merchant cash advance consolidation does have its uses, but only if it pays off the full amount of the old advances, brings down the total cost, and fits the business’s cash flow. Watch also for any hidden guarantees. Here are five tests to apply to ensure a consolidation offers true relief and not just costly delay.

Pay Off Each Advance in Full

Test one: Start by asking whether the consolidation loan would be able to pay off each merchant cash advance in full. Failing to pay off each advance can mean that the business is still responsible for making two daily payments, both for the old advance and the new consolidation loan. Some of the old lenders will get paid off, but you’ll continue to owe payments on the remaining advances.

Ask each lender for the amount of money needed to pay off each debt at any given time and make sure that the debt consolidation company has provided enough funds. Get this information in writing.

Test two: rule out a reverse consolidation. In one, the new funder may send you money in weekly installments. The lender gives you the cash, but you have to pay all of your old MCAs, plus the new funder. In that setup, you may have to pay back the full amount of the advance even though the money is received only in bits and pieces. One legal firm estimated that the business could end up paying the equivalent of at least 250 percent interest.

Make sure that you understand what payments you still have to make after getting the loan. You may also want to ask for evidence that any old accounts have been fully paid.

Total Cost

Test three: The consolidation may reduce the amount of the daily or weekly payments. Yet the lower payments can extend the repayment period. Don’t let a lower weekly payment hide a higher total cost to the company. Look at the total amount of the payments on your merchant cash advances versus the new deal.

After fees, what funds are left after receiving the loan? An origination fee comes out of the money you receive. The full cost of the debt can include more than the ACH payments and the final sum paid on this loan. Watch out for any other fees, such as pre-payment penalties, associated with paying off the loan early.

Test four: Even if the total cost of the loan seems to work out in favor of the company, there may be problems if the payment schedule doesn’t fit the business’s cash flow. Make sure you understand the payment schedule and that you can match it to your cash flow. Will your income be enough to cover the new payment, all your other debts, and keep the business running?

Before you apply, keep in mind that qualifying for an MCA debt consolidation depends on who’s providing the funding. No one rule applies to all consolidation providers. The debt consolidation company will likely ask for bank statements, a list of debts, and any contracts and payoff quotes for MCAs.

If your business has missed payments or is under a legal notice, tell the company you’re speaking with. Just remember that a pre-qualification isn’t the same as the final offer. Check also whether the representative is part of the funding company or works as a broker. Ask if the broker or the funder is the one who determines whether you get a loan.

Test five: In some cases, you may have signed a personal guarantee on a loan. Find out how these guarantees would be handled in a consolidation. Check whether any UCC-1 filings will be lifted. A broker’s promise doesn’t release you from a lien. Figure out how the payoff figure could change if funding comes late.

Don’t lose your original contract or signed agreement to pay. Keep proof of your payment and written notice that your account is paid in full. Ask for a release letter as evidence that each debt has been paid off.

Negotiate a Workout with Its Existing Lenders

The debt consolidation loan may not be the best solution if any of the existing advances can’t be fully repaid or if the new total repayment cost is too high. In that case, check to see whether your business can negotiate a workout with its existing lenders. The funding agreement may include a reconciliation clause that allows comparing actual sales or receivables with the amounts withdrawn. The business may be able to negotiate a settlement with the lender. The IRS generally treats forgiven debt as income, subject to tax.

An attorney can review the loans, seeing what rights you have and what’s in dispute. Like a settlement company, a legal service may offer to hold the payments in an account while disputes continue. The money in your account doesn’t count as payments to creditors.

If your business has received court papers, or is under an account restraint, consider seeking legal advice quickly. Legal proceedings are on strict deadlines, and applying for financing doesn’t pause any of those deadlines.