Reverse Consolidation: What Is it and How Does It Work?

What is a Merchant Cash Advance?

At some point or other, your business is likely to rely on a form of debt financing, or borrowing capital. Merchant cash advances provide a quick and easy way to almost immediately receive funds. To help pay back a merchant cash advance, some business owners look to use a reverse consolidation. If you have already used or are considering using a merchant cash advance for business funding, then it’s a good idea to understand what a reverse consolidation is and how it works.

Let’s jump into it!

What is a Merchant Cash Advance?

A merchant cash advance, or business cash advance, is a type of business financing method that is given to businesses to increase its working capital. They tend to be used in the short-term and are a great funding method for small and medium sized businesses that are getting started. Small companies tend to face hurdles when attempting to be approved for a loan, so a merchant cash advance can serve as a saving grace.

A merchant cash advance is typically a loan with a term that ranges between 2-24 months. The most popular term for a merchant cash advance is one year long. The financier then receives repayment for the loan by pulling payments from the business’ account through an automatic clearing house (ACH) or from the merchant account revenue.

What is Reverse Consolidation?

There are various types of consolidations for businesses who have taken out a merchant cash advance. Some of these include: factoring of business’ accounts receivable, alternative cash advance consolidation, and commercial real estate consolidation. But here, we will focus on a reverse consolidation and what it is.

A reverse consolidation means that a reverse consolidation funder will provide the business with a loan in exchange of taking on the daily or weekly payments incurred from the merchant cash advance. By doing so, the business is granted an extension on their repayment term. So, the business will pay back the reverse consolidation financier a portion of what it was paying the cash advance lender, but now, for a longer amount of time.

How Does Reverse Consolidation Work?

By extending the loan repayment term, a reverse consolidation lender provides a business with more breathing room. This is especially useful if cash flow is tight or credit sales aren’t performing as well as expected. By taking out a reverse consolidation, it can typically lower payments by 40% to 60%.

This means there’s higher net cash within the business because of the lower payments. It’s also a good way to consolidate multiple cash advances. The easiest way to think of a reverse consolidation on a merchant cash advance is that it turns the loan into a larger loan with a longer repayment period with small repayment amounts.

To manage your business funds efficiently and receive transparent spending reports, consider utilizing procure-to-pay software services.

Reverse Consolidations Vs. Regular Consolidation

Both reverse consolidation and regular consolidation are used as methods to help pay back a merchant cash advance, but they differ in a major way.

A reverse consolidation continues to pay back the MCA lender, it’s just with funds from the reverse consolidation lender. On the other hand, a regular consolidation loan will give your business the funds to pay back your existing loans at once. Then, you have a new loan term with the consolidation lender instead of the MCA financier.

Benefits of Reverse Consolidation

Small businesses that are facing trouble paying back their MCA loans will look to a reverse consolidation lender for assistance. There are several benefits that come along with a reverse consolidation, like:

1. Reduce weekly payments:

The reverse consolidation lowers the weekly repayment that a business owes as the reverse consolidation lender takes on the debt to pay back the MCA lender.

2. More access to cash:

If a business has multiple MCAs to pay back on a daily or weekly basis, then it can become strapped for cash. Since the reverse consolidation lender will infuse the funds to pay back MCA lenders, the business is able to have more cash on hand. It will turn the multiple repayments owed into one sum that will then be owed back to the reverse consolidation lender.‍

3. Bridge for better options:

As a business with multiple MCA loans and debt stacking, it could be hard to obtain a traditional loan like a SBA loan. The high interest rates and short repayment terms become hard to keep up with. But, with the reverse consolidation options, businesses have an opportunity to receive more capital funding for the time being until the situation evolves and they can qualify for betting financing options.

Challenges of Reverse Consolidation

While a reverse consolidation may be a necessary and welcomed option, it doesn’t exist without its share of drawbacks. These downsides include:

1. Not reducing debt in the short-term:

Even though a reverse consolidation removes the burden on the business to pay back the MCA loan, it doesn’t reduce debt. In fact, it may end up increasing overall debt.

2. Loan terms are long:

Naturally, the smaller repayments owed at a time will result in a longer loan term. This is important to keep in mind in the event you’ll want to take out more loans in the future.  

3. Owe more money:

‍The aid of the reverse consolidation lender comes at its own price. So, you can end up owing more money than what you had initially sought to borrow.  

The Bottom Line

A merchant cash advance is a really useful tool for many types of businesses. For businesses with bad credit or businesses seeking cash quickly, a merchant cash advance can be the perfect solution. However, some businesses will find it hard to pay back merchant cash advances on a daily or weekly basis depending on their credit card sales.

If this happens, then it may be worthwhile to consider taking out a reverse consolidation loan, which will make the MCA repayments for you. In turn, you will extend your loan terms and make smaller, but overall more repayments directly back to the reverse consolidation lender.

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