Reverse Consolidation Pitches: 5 Questions About the Cash, Payments and Old Balances

They Deposit Money, Usually Weekly

Why does a reverse consolidation lender buy off your old advances, or wipe out your first lender’s UCC-1 filings? It doesn’t. Instead, they deposit money, usually weekly, that you use to make those daily debits. This lowers your weekly expense and raises what you pay over time. Here, your old loans keep going. There’s usually a new UCC filing.

Where does the cash go? It goes to your account. The new funder deposits money there, and you use that to keep the old funders paid. There’s no lump sum or any large payout, up front, at closing.

But the downside is a longer repayment term: more time between starting to pay and the first day that you won’t owe anyone anything. While you trade a daily bill cycle for a single weekly debit, the older authorizations don’t go away. If the weekly deposit is late or short, old advances’ debits can bounce. And, the new lender’s repayments keep going even after the old daily debits end. It may help to budget for both schedules at once.

What happens to your old balances? They shrink only when the old lenders receive a remittance. Until each is paid in full, you owe the old funders and the new one at the same time. The new lender will usually add a new UCC-1 filing, a public notice of their claim to your business property. Old filings stay as they are at the start. A payoff does not create a termination. Check that a termination document is filed. Search your state registry for the exact name of your business, not what you’re known by, and count how many show up. You might have to pay for it.

When you compare reverse consolidation with conventional types of debt consolidation, the differences lie in timing. Standard consolidation pays off the included advances up front with a lump sum. Reverse consolidation pays nothing off up front, so the old loans remain in force, under their original terms.

For example, in round numbers, if a new funder deposits about $5,000 a week until the $80,000 left on three advances is paid, and you repay $1,600 a week for 78 weeks, you pay out about $124,800 in total. That’s $44,800 more than was left when you started. It’s not an actual debt payoff: really, a cash-flow tactic. Before you put your name on anything, ask to see the full-term total in writing. If that number isn’t offered when it’s asked for, that’s a warning sign. If you were only shown the weekly payment, you haven’t seen the deal. In New York, sales-based financing offers must spell out how much you receive net of fees.

Ask, too: is anything filed against your business and will any old filings be released? Does this prevent other financing? What happens if a deposit isn’t on time and one debit or another is missed? Who gets paid for doing this?

Who gets approved for merchant financing depends on recent revenue, but the lenders also check that advances are being paid back without a struggle and that the business has enough money to cover the weekly payment. Make sure you can afford the new weekly repayment before you apply.

Sometimes, what seems like a debt problem is only a matter of timing. If you see demand, have real margin, know what is squeezing you, can name its end and have a plan for the cash, you’re not running away.

A reverse consolidation can get you in trouble when revenue starts to fall and stays down, or when a new funder’s weekly deposit doesn’t keep every other finance account current. Also, if the old advances were nearly paid off anyway or the new weekly money only funds more losses, consider getting expert advice before putting your name on anything. If profit isn’t there, don’t use one lender to paper over the red from another. If you’re about to refinance into cheaper funding or already behind on an advance, adding this probably makes it worse.

Critics say it’s like financial morphine, not a cure for the pain. And if you don’t have profitable operations, this financing only prolongs your pain. But if you can see how you turn the corner, that’s a reason to pay for relief. While it’s hard to judge how you’ll feel about a merchant advance before you know the numbers, anyone who tells you to get or avoid one before doing your math is selling.

If a funder has sued you, holds a judgment or your accounts are on ice, that’s a legal problem before it’s a financial one. Take those contracts, notices and court orders to a commercial litigator and sign nothing new.