Small business owners are navigating a tough economy right now, and understanding the various options available to address the financial challenges of today’s market can be a daunting task.
One lesser-known, yet powerful solution for businesses burdened with multiple high-cost merchant cash advances (MCAs) is the reverse consolidation advance.
While MCAs offer valuable financial support to merchants, some small businesses may still struggle with cash flow, finding that a single MCA is insufficient. This is where a reverse consolidation advance comes into play, as it assists in managing multiple cash advances and simultaneously frees up additional working capital.
In this article, we will explore the concept of a reverse consolidation advance and discuss how it can contribute to your small business’s growth by providing an effective solution to cash flow challenges.
First Things First, What’s an MCA?
A merchant cash advance is a short-term funding option that allows a business to borrow against its future revenues.
The borrower receives a lump sum advance from the funder, who then debits a percentage of the borrower’s business revenues (e.g., credit card sales, debit card sales, checks, ACH transfers, etc.), either daily or weekly, until the advance is paid off.
MCAs are useful when a business is strapped for cash. However, they can also become problematic when unexpected situations occur, and a business finds it difficult to repay one or multiple cash advances.
Rather than defaulting on the initial MCA agreement, a reverse consolidation advance can give SMBs a better option to manage cash flow challenges.
Interested in learning more? Check out our recent MCA guide.
What Is a Reverse Consolidation Advance?
A reverse consolidation advance is a financial strategy designed to help businesses that are struggling with cash flow issues due to multiple financing obligations.
The primary objective of a reverse consolidation advance is to restructure these existing obligations into a single, more manageable financial instrument with better repayment terms, ultimately improving the business’s cash flow and financial stability.
In a reverse consolidation advance, a funder will offer a merchant one large advance that covers all or some of their existing MCA obligations. In exchange, the merchant will have a single, more affordable debt obligation. The funder will make weekly deposits into the merchant’s account, first larger amounts and then smaller sums, as the debts get paid off.
A Quick Example
Let’s consider a hypothetical example of a business owner named John, who owns a small pet shop. To finance his business expansion and inventory needs, John took out three separate MCAs from different providers. Here’s a breakdown of his outstanding MCA balances and weekly repayment rates:
- MCA 1: $20,000 advanced with a 1.30 factor rate and 25-week repayment term (total repayment amount: $26,000).
- MCA 2: $15,000 advanced with a 1.38 factor rate and 30-week repayment term (total repayment amount: $20,700).
- MCA 3: $10,000 advanced with a 1.44 factor rate and 20-week repayment term (total repayment amount: $14,400).
His total repayment amount is $61,100, while his weekly repayment would be $1,040 for MCA 1, $690 for MCA 2, and $720 for MCA 3 (i.e., $2,450 in total).
John opts for a reverse consolidation advance with a reputable funder that will enable him to pay off his existing MCAs and replace them with a new single financial obligation. Here’s a breakdown of the new advance:
- New Financing: $61,100 (enough to cover all MCA repayment amounts)
- Factor Rate: 1.35
- Total Repayment Amount: $82,485
- Repayment Term: 45 weeks
- Repayment Schedule: Weekly
- Weekly Repayment Rate: $1,833.00
John now has a single financial obligation with a more favorable factor rate and a manageable weekly repayment rate of $1,833.00. John will receive a weekly deposit from his reverse consolidation funder to cover his weekly payments. Again, this deposit will decrease over time as he begins to pay off, one by one, his original MCAs.
With his MCAs gone, John’s cash flow is no longer burdened by multiple weekly repayments. Instead, he now has a single weekly payment to make to his funder (based on the total advance and factor rate) for a set payment period.
This improved cash flow management allows John to focus on growing his business as he more effectively allocates resources.
Benefits of a Reverse Consolidation Advance for SMBs
Trading in your MCAs for a reverse consolidation advance has many benefits. In this section, we will explore these benefits, shedding light on how this financial tool can provide relief for small and medium-sized businesses burdened with multiple merchant cash advances.
From improved cash flow management to more favorable repayment terms, understanding these advantages can help business owners determine whether a reverse consolidation advance is the right solution for their unique financial challenges
1. Reduced Payments
One of the most significant benefits of a reverse consolidation advance, as demonstrated in the example above, is a reduction of a merchant’s weekly MCA payments. By reducing the overall repayment rate and extending the repayment term, businesses can retain more of their weekly revenue, which can be reinvested in operations or used to meet other financial obligations.
This reduced financial burden allows SMBs to better allocate their resources to other essential aspects of their operations (e.g., inventory, marketing, staffing, etc.), and can alleviate the stress associated with juggling multiple high-cost advances. Improved cash flow can contribute to more stable business growth and a stronger financial foundation as SMBs focus on long-term strategies and goals.
2. More Access to Capital
With reduced payments comes increased access to working capital that would otherwise be tied up in repaying multiple cash advances.
This opportunity for additional access to capital can be crucial for businesses facing unforeseen expenses or looking to invest in growth opportunities, such as purchasing new equipment, expanding their product lines, or hiring additional staff. The availability of funds allows businesses to be more agile and responsive to market changes and industry demands, contributing to long-term success.
In essence, a reverse consolidation advance can serve as a lifeline for businesses in need of extra funds while simultaneously managing the repayment of multiple merchant cash advances.
3. Peace of Mind
Finally, a reverse consolidation advance can provide desperate SMBs with peace of mind in turbulent economic times.
Juggling several high-cost MCAs can be incredibly stressful for business owners, as the constant pressure of repayment obligations can take a toll on their mental well-being and overall productivity. A reverse consolidation advance alleviates this stress via a single financial instrument that replaces multiple MCAs.
This streamlined approach to debt management allows business owners to focus on growing their businesses without being weighed down by the constant worry of multiple repayments.
Expect improved decision-making, enhanced creativity, and a more positive outlook on the future of the business.
Reverse Consolidation FAQs
If this is the first time you’ve read about reverse consolidation advances, you’re likely to have some questions. In this section, we will address some of the most frequently asked questions about this powerful tool. This information will help clarify any uncertainties and provide a better understanding of how reverse consolidation advances work.
Will a Reverse Consolidation Advance Affect My Credit?
A reverse consolidation advance may have an impact on your credit, depending on the specific terms and conditions of the agreement and the reporting practices of the funder.
Unlike traditional loans, which are more commonly reported to credit bureaus, not all alternative financing providers report reverse consolidation advances. The impact on your credit will depend on whether the financial provider reports your payment history to credit bureaus.
If the provider reports to credit bureaus, making timely payments can positively affect your credit score, while missed or late payments can be detrimental. Successfully consolidating multiple MCAs into a single advance can also lower your credit utilization ratio, potentially improving your credit score.
Again, the overall effect on your credit will depend on your unique financial situation and the specific terms of the advance, so consulting a financial professional is recommended.
How Many MCAs Can I Consolidate at One Time?
The number of MCAs you can consolidate at one time with a reverse consolidation advance largely depends on the specific funder’s guidelines and your unique financial situation.
Some funders may have a limit on the number of advances they are willing to consolidate, while others may focus more on the total outstanding debt amount rather than the number of advances. It is crucial to work closely with your funder to understand their policies and determine the best course of action for consolidating your merchant cash advances.
By assessing your current financial situation and debt obligations (i.e., what you qualify for and what you can afford to pay back), the funder can help you develop a tailored reverse consolidation plan to manage your multiple advances effectively.
How Much Will I Save?
Businesses can save considerable amounts of money in the short term with a reverse consolidation advance. In our experience, SMBs can potentially lower their current daily or weekly payments by as much as 30-50%.
How Can I Apply for a Reverse Consolidation Advance?
The first and most important step is to find a reputable funder. Once you have one in mind, the application process is relatively simple.
The funder will most likely require you to provide essential information about your business, including outstanding merchant cash advances and financial statements, which may include bank statements, tax returns, and other relevant documents. They will review your application and assess your financial situation to determine your eligibility for a reverse consolidation advance.
Nexi can help your business better manage monthly MCA payments with a single reverse consolidation advance. The minimum requirements are the same as applying for a merchant cash advance.
Your business must have at least 12 months in operation and at least $100,000 in annual revenue.
You must also provide:
- Essential details about your business (submit through an online application).
- Basic information regarding your invoices.
- Either a connection to your bank account or the three most recent months of your bank statements.
If a reverse consolidation advance sounds like what your business has been searching for, look no further than Nexi.
Building a Brighter Future with Nexi
Nexi has been helping SMBs since day one, creating and perfecting the reverse consolidation advance.
What we do is simple: provide SMBs with alternative financing to get them the capital they need, when they need it. We do it all while upholding the highest standard for responsible financing.
If your business is struggling to make payments on multiple MCAs, a reverse consolidation advance could be the perfect financing solution.