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. 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.