What Is MCA Reverse Consolidation? 5 Parts of the Structure to Examine

A merchant cash advance reverse consolidation is a new advance taken to pay for all the daily advances being repaid from your checking account. The new funder deposits money weekly into your account to cover your existing daily MCAs. You repay that new advance in a smaller weekly payment over a longer term. The problem is that the old advances aren’t paid off upfront, so your payment falls, but the total you must repay rises. Your funder will usually be listed on a new UCC filing, showing money owed and tying it to your company. It is primarily a cash-flow tool for you, not a debt reduction strategy.

Tempting as a merchant cash advance reverse consolidation may be, it does you no good when a creditor has already sued you. If you do have an active or pending lawsuit, seek legal advice before you sign anything new.

Five Parts of the Structure

Assuming your actual problem is that the daily debits hurt your cash flow, start here. There are typically five parts of the structure to examine.

The first piece of the puzzle here is those weekly deposits. The new money arrives in your account weekly, where it is available to cover the existing old debits, which continue to be repaid. The deposits have to be accurate and on time for them to work. They can be late, short, reduced, suspended or stopped depending on account activity, revenue, returned payments or other financing. If the deposits fail or are cut off, the old debt is still unpaid and still owed.

As a simple illustration: consider $5000 of MCA payments withdrawn during a week; with a deposit of $4000 from the new provider; and where the $1500 is paid back to the consolidation company. Obviously you did make a $1500 payment to the consolidator, but as the overall amount going out per week is cut back to $2500 as against $5000, you have gained better cash flow. Temporarily at least you are getting cash-flow relief from the new provider, but the problem is that this does nothing about the actual indebtedness.

The second part of this type of consolidation is what happens to the old MCAs you are trying to “consolidate”. They aren’t paid off in full immediately, which is the big downside here. The old contracts stay in place until the old balances are satisfied, so your daily remittances go on automatically until those contracts run their course. That said, it has to be noted that the new balance keeps on going after the old ones are satisfied. These are commonly sold as standard merchant cash advance consolidations, but really aren’t. A standard consolidation pays off existing included advances with a lump sum. That is a valuable benefit that is not here. In a reverse consolidation the incoming deposits cover the older obligations daily, while the new contract runs side by side to the old ones.

The third part to consider is that the full cost to you over the full term will, again, go up rather than down. To illustrate the point, let’s say the funder deposits just about $5,000 into your account every week, just about what it takes to pay the old daily payments, until the old balances are covered, roughly $80,000 or so on three advances. Now consider that you will likely repay $1,600, or so, every week for about 78 weeks to fully repay that new debt, for a total cost of roughly $124,800, or so. That’s about $44,800 in extra money owed. Does that seem reasonable to you? What will you have to show for it when it’s all done? Will any debt have been eliminated?

Providers of cash advance reverse consolidation loans advertise payment cuts of 20% to 55% but that isn’t the total, it’s the amount for each weekly payment, and effective APR can reach triple-digits. Some will quote a “factor rate” instead of APR, so make sure you get the full cost of the entire term stated in dollars, in writing.

The fourth part here is those pesky UCC filings, which add up over time. The new funder usually files one, and that is a public notice claiming your business assets. Old ones do not get released at the start of this kind of offer. When each old advance is satisfied, confirm the terminations are filed, as a payoff does not update a record by itself. Search the public records for your exact registered name. Stay on top of it.

The fifth part to look into here is the default terms, which become important if things do not go according to plan. If the new advance payments get skipped for any reason, the full contracted debt can become due, even for funding not yet received. There may be other issues as well, such as the funder restricting the taking of any other funding by the merchant. Also consider the event of debits bouncing when funding deposits don’t appear. Who is responsible, how is it resolved, and is there a real cost?

Financial Morphine

The most common criticism of this strategy is that it is only financial morphine. It can ease payment pressure without fixing an unprofitable business. If that business cannot recover, the new advance buys time you cannot use while the debt keeps on growing.

But morphine is the right approach when the patient will heal on their own if you just relieve the pressure. A consolidation fits a profitable business with real customer demand and sufficient margin whose short-term problem is the schedule of the debits, not the size of the total debt. The squeeze can be shown to end in a specific period that can be easily envisioned. Here the business’s own deposits stay in place to pay the weekly consolidation payment when the daily advances end and you have a plan for where the cash has to go and how to get it there.

Which case you are in is a matter of your numbers, not opinion. Anyone who tries to steer you into a strategy without knowing your financials is selling, not telling.

Before Signing

Approval rests mainly on verifiable recent revenue. In terms of numbers, the funder wants to see steady, verifiable deposits in your account. Another key ingredient is advances that are current and not in default. They also pay attention to your time in business and number of open advances.

Be sure to ask all your questions first. Of course you should ask about the total repaid over the entire term in dollars, which is where the real money is. You must see the fine print on what will be filed in the public records, both at the start and the end. Find out what happens if funding is late, and how bounced daily ACH debits are handled. Last but not least, ask what must happen to end this. Confirm the end date in writing, if you can.