At some stage along your company’s growth trajectory, you’ll likely need access to fast debt financing solutions if you expect to continue scaling while covering unexpected shortfalls. However, the trouble with small business financing is that the approval process can be a challenge for newer companies and business owners with unestablished or challenged credit.
Upstarts that just launched typically lack the seasonal requirements for a business loan, while most conventional business lenders will demand a spotless credit profile and careful analysis of your company’s balance sheets and performance. As a solution, an ever-increasing supply of business owners has been turning to merchant cash advance (MCA) funding as a tool for gaining quick access to the working capital needed can keep their operations running uninterruptedly.
While a merchant cash advance can be an expedient path to funding for newer businesses and companies with spotty credit profiles, this funding option isn’t without setbacks. Payments are often withdrawn daily, and an organization can quickly find itself in a toxic debt cycle if its cash flow isn’t sufficient enough to cover daily operating expenses.
It’s not uncommon for a business to juggle several debt obligations simultaneously. If this is your situation, you’re hardly alone. Countless companies have taken out multiple MCAs to only find themselves stretched. While merchant cash advances can be a great way to access near-instant funds, you might need an effective solution for consolidating and repaying them at a lower cost.
Depending on your situation, you could be approved for multiple business loan products that can be used to consolidate and pay off your existing merchant cash advance loans. Reverse consolidation funding, however, isn’t the most straightforward option for combining and paying off your MCAs. This is why it’s worth discussing how they work.
Whether you’ve already used merchant capital advances to fund your business or are considering using them in the future, understanding how the reverse consolidation lending platform functions and how it can benefit your business is vital. In this guide, we’ll closely examine how merchant capital advances work and how reverse consolidation loans help manage them. By the end, you should be able to make an informed decision about whether or not reverse consolidation funding is right for your business.
What are merchant capital advances?
Merchant capital advances, or MCAs, are a business financing solution that grants businesses short-term working capital to make payroll, finance debt payments, and cover other day-to-day operating expenses. Businesses leverage merchant cash advances as short-term means of increasing their working capital.
Since smaller companies have more trouble accessing other types of business financing, MCAs are more popular among small to medium-sized businesses than they are in larger, enterprise-level organizations. As such, they can be an excellent option for any organization that cannot access other business finance products.
MCAs serve as an advance against your future sales. When you apply for this type of financing, the creditor will likely need your last several months of cashflows before approving the merchant capital advance. After looking at your earnings history, the lender will agree to advance your credit on the basis of its best estimate of your future sales.
MCA loan terms range from anywhere between 2 and 24 months, with the typical term length being 12 months. The party issuing the advance usually collects the payments by debiting the merchant’s account revenue using an automatic clearing house ACH to route payments back to the creditor.
What is reverse consolidation funding?
As mentioned, if you’ve taken out merchant cash advances in the past, there is more than one way to consolidate and pay them back. Depending on your circumstances, you could use factoring of accounts receivables, alternative cash advanced consolidation, and commercial real estate debt consolidation.
So, what distinguishes reverse consolidation from the funding options above? To begin with, reverser consolidation financiers create these loans in exchange for assuming your weekly cash merchant payments. The reverse consolidation option gives businesses additional time to repay their obligations by extending the repayment terms.
A reverse consolidation is a loan granted specifically for the purposes of making daily or weekly payments on other existing merchant cash advances more affordable. Once you sign on to reverse consolidation funding, the creditor issues more debt payable over a period of time longer than those established in your existing MCAs. This approach often helps businesses avoid imminent default and pay back the multiple MCAs over a term more extended than the one originally scheduled.
While your business might receive additional cash to pay its current MCA obligations, the reverse consolidation funding doesn’t reduce the total amount borrowed. You’re still obligated to pay the MCA as originally agreed. The reverse consolidation funds are, in some respects, like an additional MCA that’s used to simplify the payments to your existing MCA creditors.
How does a reverse consolidation work?
The main purpose of any reverse consolidation loan is to extend the repayment periods on your current MCAs and make repayment easier to manage. Reverse consolidation is a popular solution for seasonal businesses that must cover their expenses during times of low cash flow or organizations experiencing an unforeseen shortfall attributable to circumstances outside their control.
Since severe weather and unanticipated geopolitical events that can trigger an economic shortfall are ostensibly on the rise, more business owners have discovered they need fast working capital lending solutions to cover their everyday operating expenses.
It’s worth reiterating that reverse consolidation lenders don’t issue in one lump sum, consolidating all your existing MCAs into a single payment under a new loan. Instead, a business will take out a reverse consolidation loan to make the repayment schedule more favorable by reducing repayment intervals and extending the overall time you have to repay.
It might seem counter-intuitive, but reverse consolidation loans do not immediately relieve you of your existing MCA obligations. Reverse reconsolidating funding can, however, help businesses improve their MCA payment management to reduce their outstanding MCA balances faster. Many business owners find that making payments to the reverse consolidation lender is easier than juggling multiple MCA payments at once.
How does reverse consolidation differ from standard consolidation?
While a standard consolidation loan will pay off all your existing loans at once and combine them into one payment, a reverse consolidation does not pay off your loans to complete the MCA consolidation process. Standard consolidation loans typically refinance all of a business’s debts at once, combining those loans into a single payment under one loan product with a new repayment schedule.
In comparison, reverse consolidation loans sustain your current MCA repayment plan while the funds from the consolidation lender cover those payments for your MCAs. The terms and repayment processes of consolidation loans can be confusing to some, especially since it entails two third-party lenders communicating back and forth with each other.
Reverse consolidation loans are also considered high risk for creditors. From a lending perspective, there is nothing preventing you from taking on more debt, making it difficult for your business to repay the reconsolidating lender.
Likewise, you might find that reverse consolidation loans don’t work for your purposes because you’re not reducing debt in the immediate term and you plan on borrowing again. A longer repayment term on your MCAs could impact your debt-to-income ratio and limit your future borrowing capabilities.
In sum, a reverse consolidation loan gives you the money to pay back your existing MCAs in a new loan. You repay this balance over time, while a standard or “regular” consolidation loan gives you the money to pay them back all at once.
What are the benefits of reverse consolidation?
Reverse consolidation can benefit any business that is struggling to manage the payments to its existing MCA creditors. Here are a few more ways a reverse consolidation benefits companies like yours:
Fewer weekly payments
Reverse consolidation lowers and extends the repayment periods of your MCA obligations after your reverse consolidation lender takes over the debt and starts issuing payments.
Frees up additional funds
Paying back multiple MCAs every week -in some cases, every day- can get complicated to a point where it starts to affect profits. Reverse consolidation is also an effective way to reduce your incoming cash flow. Reverse consolidation lenders help businesses free up additional working capital. It lightens your monthly MCA obligations and restructures your multiple payments into one. You’ll remit this sum to the reverse consolidation creditor, making it easier to access cash on hand.
A reliable short-term funding option
While it’s easy to accumulate multiple MCA loans, businesses that fall into this cycle can find it difficult to remain profitable. They’ll also quickly discover that if they ever default on their existing obligations, it will be a challenge to access low-cost lending solutions that can help drive growth and keep operating costs low. Reverse consolidation loans give businesses a chance to access fast capital when they require it most. At the same time, the solution helps businesses improve their future odds of finding more favorable credit.
Need a reverse consolidation business loan?
Merchant cash advances benefit any small to medium-sized business that requires access to fast working capital solutions. However, issuing payments to multiple MCA creditors carries a few unique obstacles that can drain your bottom line. If you’re managing multiple MCA debts now or plan to do so in the future, take action and start looking into reverse consolidation loans at the forefront.
For more on how our reverse consolidation business loan products can extend your MCA loan terms and reduce your payments, connect with New Bridge Merchant Capital business lending associate today.
Get started online now. Or, to speak with a senior lending specialist over the phone, dial us at 844-228-0493.
