If you have unsupportable debt from one or more Merchant Cash Advances (MCAs) and are able to qualify for a traditional consolidation loan, it will yield lower interest rates, longer repayment periods (which makes it easier to manage your cash flow), and monthly–not daily–loan payments. Unfortunately, most business owners in this situation don’t qualify for a consolidation loan because a company with many debt obligations is considered high-risk for conventional lenders. This typically leaves borrowers with one of three options:
- Another high-interest MCA, this one with slightly easier repayment terms
- An MCA Consolidation Loan
- An MCA Reverse Consolidation Loan
This article will outline the pitfalls of these options and offer a fourth alternative that just might be the solution to your debt troubles.
The Worst Option: Another Merchant Cash Advance
Acquiring additional cash advances beyond your first is called “stacking.” Many business owners fall prey to this “solution” because MCAs are quick and easy to obtain, and don’t require collateral or a high credit score. If the new MCA covers the costs of the others and has smaller repayment terms over a longer period, this will certainly remove pressure in the short-term. However, as you already know, this type of advance is very expensive, and now you have additional fees to pay on top of what you owe to the other MCAs. Even with gentler repayment terms, stacking another MCA onto your existing debts almost always leads to business failure.
A Better Option: MCA Consolidation or Reverse Consolidation
The goal of consolidation is to put a merchant back on track towards long-term sustainability. Theoretically, this is a great solution to unsupportable daily payments and a strangled cash flow.
With an MCA consolidation loan, a cash advance company will buy out all your existing cash advances and roll them into a single payment at a more manageable rate and term. Some funders require the business owner to net 50% of the loan amount after the cash advances are paid off. This means that a new loan for $100K can only be acquired if the merchant owes an amount of less than $50K to her other creditors. In other cases, consolidation and refinance funders are willing to pay off the entire amount of cash advance debt but just not offer any new funding.
In a reverse consolidation scenario, the multiple MCAs remain in place, but the lender covers the cost of the daily payments. In return, you pay the reverse consolidation company a fraction of what you have been paying–again for a longer term. Therefore payments are made to the reverse consolidation provider well after all the other cash advances are paid in full.
As you can see, the results of consolidation and reverse consolidation are inherently the same.
The Best Option: Debt Elimination
In almost all cases, trading debt for debt is a bad idea. Ideally, the purpose of another loan should be to increase revenue and expand profitability–not simply to cover other debt.
Debt consolidation seems like a solution because it frees up cash flow, which can prevent your business from being crippled by having too many open positions. The bottom line, however, is that you remain indebted for the same amount, only now with added interest and fees.
If your company is at a crossroads, strategic debt elimination may be able to provide you with far more relief. This is because you’re actually eliminating 70-95% of the debt.
Here’s what that means for you. Let’s say you have $100K of outstanding debt to multiple creditors. This may include SBA debt, MCAs and unpaid invoices to vendors. By seeking the assistance of a reputable debt elimination and corporate turnaround consultancy such as Second Wind, you might get ten months of repose, meaning a halt in your daily and monthly payments to your creditors, which frees up your cash flow. As a result, you can save up for a final settlement that will be far less than the original $100K that you owe. Once resolved, you will receive letters of release from your creditors, freeing your business to re-emerge as a healthy entity once again.
To summarize, the advantages of a debt workout and corporate reorganization are that it:
- Immediately protects your cash flow from creditor payments
- Releases your personal guarantees, liens and confessions of judgment (both personal and business)
- Protects your customers from creditor attacks (UCC letters)
- Positions your company for growth