Reverse Consolidation MCAs: 5 Ways the Structure Can Worsen Debt Pressure

If your Merchant Cash Advances are drowning you and the payment pressure is too much, you might be tempted to look at a Reverse Consolidation MCA. The MCA on top does not pay off your other MCAs. Reverse consolidation creates new debt that pushes you even further underwater and extends the time you’re stuck at the mercy of your lenders’ weekly demands. Yes, a Reverse Consolidation does usually give you smaller weekly payments than a regular Merchant Cash Advance--but they can last longer. You can wind up paying more in the long run, with your debt problems postponed but not solved.

Cover Your Multiple Existing Lenders’ Daily Withdrawals

How does it work? New funders deposit funds directly into your account each week to cover your multiple existing lenders’ daily withdrawals. As before, your MCAs are being paid, but now with the new lender’s money instead of your money, and so your own cash flow is relieved. Most of the money going in your account each week just goes right back out again as ACH and MCA payments. Reverse consolidation loans are sold as a way to lighten the load, as they usually have payments substantially lower than the debt they cover.

A restaurateur, for example, has 3 stacked merchant cash advances. They’re coming for $800 per day of the work week, or $4000 per week. A funder offers a reverse consolidation loan to cover those payments with just $2500 a week. It sounds good to the owner - $1500 a week freed up - but now he owes the funder for 18 months in addition to the MCA balances. That $4,000 a week is still going out, but it is coming from the reverse consolidation lender.

The Balances Remain

Your payments are lighter, but the balances remain. Instead of unstacking the MCAs, you’re adding another layer to the mix! Now you are tied to this funder and how they decide to behave in addition to your existing lenders. If your business model could not support the level of debt you’re at now, this creates an even higher mound that your business needs to climb.

What happens when you add a layer on top of a pile? It takes longer to climb out from underneath it. Now not only are you paying the MCAs with the funder’s money, but you are paying back the funder itself, for more weeks and months than your original debts. A business owner with 6 months left on stacked MCAs may find herself making payments for 18-24 months on the reverse consolidation loan, while the original MCAs keep making their same daily withdrawals the whole time. She was trying to dig out but is only digging deeper.

Like an MCA, a reverse consolidation is another funding option, with the cost disguised in a factor rate instead of an interest rate or APR. The federal Truth in Lending rules apply to loans to individuals, but not to business loans. Federal Reserve researchers found a provider advertising a 1.15 factor rate that worked out to about 70 percent APR. Reverse consolidation loans’ rates often reach 200-350% APR if you convert them. Moreover, your debt doesn’t amortize, so paying off your debt early doesn’t save you any money. In some contracts a prepayment penalty can even be in place.

When you take on a reverse consolidation loan, a new UCC filing goes on your business’ assets. The lien on your business does not relieve you of other ones, either. It is not a good practice to add even more liens to your business’ already strained credit. The balance of debt to collateral may now be so out of hand that other lenders may not consider working with you. If the business fails you are stuck with one more company coming after your business assets.

What if cash flow falls? Remember, your business’ sales cashflow determines whether you can pay. Fewer funds in the account can result in insufficient funds for making weekly and daily payments. You would be at the mercy of collections and face an increased chance of litigation from several creditors if you miss payments. What’s one thing worse than being underwater on your debt? Having even more parties wanting a piece of the same collateral. Your personal assets may also be at risk if you signed a personal guarantee.

When All Other Options Have Been Exhausted

In some situations a reverse consolidation may be necessary in order to buy time when all other options have been exhausted. If your business is facing an immediate crisis, you might consider a reverse consolidation loan as the best of your bad options. If you need relief so you can buy yourself a little more time to work your way out of a financial jam, consider the details and quality of your financial projections before proceeding. Are expected profits accurate and realistic? If it appears that your loan debt is a monster eating your business’ every available dollar, then reverse consolidation is not the way to slay the beast.

How can you go from snowed under to daybreak? More debt is not the answer. Negotiating directly with your MCA lenders for a reduced payoff could help. While you are talking to a lender, it is possible to work out modified terms. If your lenders won’t, another way to reduce debt may be to consider settling with your lender for less than is owed. Options for some businesses include business bankruptcy, but it is not without significant consequences and should be discussed with an attorney or trusted advisor before proceeding. If you proceed with reverse consolidation, have an attorney review the terms first, and read all the fine print.