What is Merchant Cash Advance Consolidation?
Merchant cash advance consolidation is a financial strategy that allows businesses to manage multiple MCAs by combining them into a single, more manageable payment plan. As businesses grow, they might take on several MCAs for cash flow needs or repay an existing MCA. This leads to overwhelming daily or weekly payments.
MCA loan consolidation combines these advances into one loan, typically with better terms, which results in the businesses gaining financial stability.
According to Adroil Market Research, the Merchant Cash Advance market is expected to grow at an annualised growth rate of 5.03% till 2029.
How does merchant cash advance consolidation work?
MCA consolidation works by securing a new loan, often from a specialised consolidation lender, to pay off multiple existing MCAs. Instead of juggling various high-interest payments, the business now has just one loan to manage.
The lender negotiates with the MCA providers on behalf of the business to reduce the overall burden of debt. And this new loan usually comes with a lower interest rate and more favourable terms. Let’s understand it with an example.
Suppose a retail business has taken out three MCAs totalling £100,000, with daily payments of £1000. These payments are draining cash flow, making it hard to cover other expenses. Through MCA consolidation, the business gets a new loan of £100,000 with monthly payments of £4000.
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Process of MCA consolidation
The process of MCA debt consolidation involves the following steps, generally:
- Total assessment: The first step is assessing the total debt from all MCAs, including payment schedules, interest rates and the remaining balance.
- Finding a lender: Next, the business finds a consolidation lender who specialises in MCA consolidation. The lender will evaluate the business’s financial health to see if it’s eligible for the process.
- Negotiating terms: Now, the consolidation lender negotiates with the MCA providers to settle the debt, aiming to reduce the overall repayment amount. This negotiation can also mean extending the payment terms.
- Loan approval: Once this negotiation is successful, the lender provides a new loan that pays off the MCAs. The business now has a single loan with manageable payments.
- Repayment process: The business now begins repaying the consolidation loan according to the agreed terms.
Types of merchant cash advance consolidation
MCA debt consolidation can be approached in several ways, each with its own benefits and suitability. Apart from the traditional MCA consolidation, there are 4 other methods.
1. Reverse consolidation loan:
Unlike traditional consolidation, where a new loan pays off existing debt, reverse consolidation works by reducing the daily or weekly payments of the existing MCAs without settling them upfront.
It provides a new, lower daily payment amount, which gives the business some breathing space.
2. SBA loan:
Small Business Administration (SBA) loans offer a more traditional consolidation method by providing long-term, low-interest loans. These loans are government-backed which makes them less risky for leaders and often come with favourable terms.
By the way, qualifying for an SBA loan can be challenging, as it requires a good credit score and a solid financial history.
3. Debt settlement program:
Debt settlement involves negotiating directly with MCA providers to reduce the total amount of debt owed. This approach omits the necessity of obtaining a new loan; rather, it involves negotiating with creditors to resolve the debt for a reduced amount.
Keep in mind that while debt settlement can significantly reduce the amount of debt, it can have a negative effect on the business’s credit score.
4. Credit line consolidation:
It involves using an existing or newly established business line of credit to pay off multiple MCAs. Once the MCAs are paid off, the business only has to manage the line of credit which has typically more flexible terms.
What to consider before choosing merchant cash advance consolidation?
When considering an MCA consolidation loan, it’s important to weigh several factors to ensure the chosen solution aligns with your business needs.
- Current financial health: Evaluate your cash flow and how MCA repayments are affecting it.
- Total debt load: Calculate the total amount of debt your business is carrying from all Merchant Cash Advances. This helps in determining the right consolidation approach, whether it’s a reverse consolidation loan or another type of consolidation.
- Costs and fees: Each MCA consolidation method comes with its own cost, including interest rates and possible penalties. Compare these costs against your current MCA obligations to find out if consolidation will save money in the long run.
- Repayment terms: Consider the length of the repayment period associated with the consolidation option. You’re trying to pay an existing debt, not tying up your feet with another cruel one.
- Reputation of the consolidation provider: Ensure that the consolidation lender has a solid reputation. Check reviews, ask for references and verify their experience in dealing with MCA consolidations.
Pros & cons of merchant cash advance consolidation
Weighing the advantages and disadvantages of MCA consolidation is important. How else will you be able to arrive at a decision?
Pros
- Simplifies repayment process: One big benefit of MCA is the flexible repayment structure. Consolidation takes it one step further. It does this by combining multiple advances into a single monthly payment. With one predictable payment, it’s easier for your business to budget.
- Improves cash flow: Consolidation can reduce the total amount you need to pay each month, freeing up cash flow for other business expenses. This way, you may allocate more funds to growth activities.
- Avoids default: If your business is at risk of defaulting on one or more MCAs, consolidation can help prevent this by reconstructing your debt into more manageable terms.
- Customised repayment plans: Many MCA consolidation providers offer customised repayment plans that are directed towards your business’s needs, hence providing flexibility standard MCA agreements often lack.
Cons
- Long-term costs can rise: While MCA loan consolidation might lower your monthly payments, it can also extend the repayment period. This could result in higher overall interest costs over time.
- Fees can be expensive: Some consolidation programs come with upfront costs, including origination fees and service charges. Be cautious of hidden fees that could make your consolidation less cost-effective.
The advantages and disadvantages are represented in the table below:
| Advantages | Disadvantages |
|---|---|
|
Simplifies repayment with a single monthly payment.
|
Long-term costs can rise due to extended repayment periods. |
|
Improves cash flow by reducing monthly payments. |
Fees can be expensive, including hidden costs. |
|
Helps avoid default by restructuring debt. |
|
|
Offers customised repayment plans for flexibility. |
|
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FAQs
MCA consolidation involves combining multiple cash advances into a single loan with more favourable terms. This simplifies repayments, often lowering the monthly amount and helping businesses manage their cash flow more effectively by reducing high MCA fees and interest rates.
MCA consolidation can enhance cash flow, reduce total interest rates, and streamline repayment plans into one monthly payment. This is especially beneficial for companies managing several MCA payments, which can be burdensome and expensive.
MCA consolidation may stretch the repayment duration, thereby possibly raising the total interest paid over time even when it can lower monthly payments. Consolidation can also include costs, and some MCA lenders could enforce prepayment penalties.
