What is a Reverse Consolidation?

E.J. Simonsen
Published On: Nov 15, 2021 9:30:49 AM
Updated On: Nov 15, 2021 10:30 AM

If your business is struggling to keep up with multiple merchant cash advance payments, you may be looking into consolidation options. One of the more popular and diabolical merchant cash advance consolidation options is called a reverse consolidation. This article will take a look at what a reverse consolidation is, the claimed benefits, and why it's rarely a good solution for businesses.

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What is a Reverse Consolidation?

A reverse consolidation is a type of MCA or loan that predatory lenders claim can help a business that has already stacked a number of merchant cash advances. When a business signs for a reverse consolidation, the reverse consolidation lender will provide the business with a new MCA or loan, to help them afford their daily or weekly MCA payments. 

Typically, the MCA or loan offered by a reverse consolidation lender is for a large sum and is advanced in increments over a longer period of time than the business’s current MCA repayment schedule. This means the business will receive a cash infusion on a weekly basis in excess of what is due to their current MCA creditors.

It's important to know that a reverse consolidation doesn't reduce the amount a business owes, or consolidate your outstanding MCAs. A reverse consolidation can help make the daily or weekly repayment schedule more manageable in the short term, but does, in essence, add another MCA onto your business's plate, albeit with a longer payment period than most short-term MCAs. 

What are the Benefits of a Reverse Consolidation?

A reverse consolidation can provide a respite for businesses who have been struggling to keep up with multiple daily, weekly, and monthly merchant cash advance loans, but it's important to weigh those benefits against the drawbacks. Let's look at both.

Key benefits of a reverse consolidation: 

  • Longer payment period. Because a reverse consolidation extends your overall MCA repayment term, your business can push payments out over a longer period of time. 
  • Improved cash flow. In the short term, a reverse consolidation infusion of capital will lighten the financial load. Your business’s improved cash flow will make it easier to pay the daily and weekly MCA payments, but your business is still responsible for making all of those payments.
  • Offers a bridge to prevent default. Merchant cash advances are draining on any business. While they might provide some benefits, predatory lenders are out to make as much money as they can off small and midsized businesses. MCAs are tough to get out from under. A reverse consolidation offers a short term bridge to prevent default. 

What are the Disadvantages of a Reverse Consolidation?

Any financial decision has pluses and minuses. There are pros and cons to any type of debt, as we covered in our Unsecured vs. Secured Debt: What's the Difference? post. Before your business makes a decision on a reverse consolidation, it's important to know that a reverse consolidation can come with some very hefty consequences. 

  • A reverse consolidation doesn’t consolidate your payments. While it can provide money to help pay other merchant cash advances, it will not pay them off or consolidate the debt into a single lower payment.
  • A reverse consolidation doesn't reduce business debt. While a reverse consolidation can provide your business a little breathing room to improve cash flow and prevent a default, it won't reduce the amount of the business's debt. While in some instances, the reverse consolidation lender will coordinate the weekly cash advance to you with the required MCA payments to others, your current MCA daily or weekly payments are still due and required under those contracts. 
  • A reverse consolidation's terms are typically long. In general, a reverse consolidation's terms are much longer than typical MCA terms. After the initial or weekly infusion of capital, the business has to bear the extra burden of reverse consolidation payments. The long term and extra payment obligation can prevent your business from qualifying for additional loans in the future. 
  • Your business will pay more over time for a reverse consolidation. A reverse consolidation lender will require you to sign a contract that obligates your business to pay back far more money than you will ever receive. Moreover, you will be obligated for the entire payback amount even though they will “drip” the advances into your account on a week-by-week basis. The terms of a typical reverse consolidation is the equivalent of paying 250%-400%+ in interest.  

When is Reverse Consolidation Right For Your Business?

A merchant cash advance reverse consolidation can provide the cash needed to prevent an imminent default, but it's rarely the right move for most businesses. 

If your business has the funds to repay a merchant cash advance, it's always best to minimize that debt before taking on more debt. But, if your business is struggling to make multiple MCA payments, and may be unable to fund daily operations, then a reverse consolidation could help, but is likely putting off an inevitable financial collapse.

Not sure where your business should turn? Being harassed by multiple MCA lenders? The Lane Law Firm can help! Get in touch with our merchant cash advance attorneys today. They can help defend your business against predatory lenders, and offer debt restructuring options that best suit your business needs. Take action today! Schedule your free initial consultation now.