Financial Guides

Reverse Consolidation: How Does It Work?

Every business encounters the need for financial support, often resorting to debt financing for capital. Merchant cash advances offer a swift and convenient avenue to promptly acquire funds. For those navigating the repayment of a merchant cash advance, the concept of reverse consolidation becomes a valuable consideration. Whether you've utilized this financing method before or are contemplating its use, understanding reverse consolidation is key.

Let's delve into the details!

Demystifying Merchant Cash Advances:

A merchant cash advance, or business cash advance, serves as a short-term financing solution to bolster a business's working capital. Particularly beneficial for small and medium-sized enterprises, these advances circumvent the challenges often faced by smaller companies seeking traditional loans. With repayment terms typically spanning 2-24 months, the most prevalent duration is a year. Repayment is facilitated by automatically deducting payments from the business's account through an Automatic Clearing House (ACH) or from merchant account revenue.

Exploring Reverse Consolidation:

Various consolidation methods exist for businesses that have opted for a merchant cash advance. Options include factoring accounts receivable, alternative cash advance consolidation, and commercial real estate consolidation. The focus here is reverse consolidation.

Reverse consolidation involves a funding entity providing a loan to the business in exchange for assuming the daily or weekly payments associated with the merchant cash advance. This extension of the repayment term allows the business to make reduced payments to the reverse consolidation financier over an extended period.

The Mechanics of Reverse Consolidation:

By elongating the loan repayment period, a reverse consolidation lender affords the business greater financial flexibility. This proves especially advantageous during tight cash flow situations or when credit sales fall short of expectations. Opting for reverse consolidation can typically result in payment reductions ranging from 40% to 60%, generating higher net cash within the business. Essentially, it transforms the merchant cash advance into a larger loan with an extended repayment period and smaller installment amounts.

Reverse Consolidations vs. Regular Consolidation:

While both methods aim to aid merchant cash advance repayment, they differ significantly. In a reverse consolidation, repayments to the MCA lender continue, but with funds from the reverse consolidation lender. Conversely, a regular consolidation loan provides funds to settle existing loans at once, establishing a new loan term with the consolidation lender.

Benefits of Reverse Consolidation:

Businesses struggling with MCA repayments can find relief in reverse consolidation, offering several advantages, including:

Reduced Weekly Payments: Lowering the weekly repayment obligation as the reverse consolidation lender assumes the debt for MCA repayment.

Increased Access to Cash: Transforming multiple MCA repayments into a single sum owed to the reverse consolidation lender, providing the business with more available cash.

Bridging for Better Options: Offering a temporary capital funding solution for businesses facing challenges obtaining traditional loans until they qualify for more favorable financing.

Challenges of Reverse Consolidation:

While a viable option, reverse consolidation has its drawbacks, including:

Short-Term Debt Reduction: Although it eases the immediate burden of MCA repayment, reverse consolidation may not result in a reduction of overall debt and could potentially increase it.

Extended Loan Terms: Smaller repayments over time lead to a longer loan term, which should be considered for future borrowing needs.

Increased Debt: Assistance from a reverse consolidation lender comes with its costs, potentially leaving the business owing more than initially borrowed.

The Bottom Line:

Merchant cash advances play a crucial role for many businesses, especially those with urgent cash needs or challenged credit histories. For businesses struggling with daily or weekly MCA repayments, exploring a reverse consolidation loan can be a strategic move. It extends loan terms, lowers repayment amounts, and directs payments to the reverse consolidation lender.

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