Can You Consolidate MCA Loans? (And Why You Might Not Want To)
Merchant cash advances (MCAs) can seem like an easy way for small businesses to get quick cash. Unlike traditional bank loans, MCAs don’t require good credit or collateral. The funds are deposited directly into your business bank account, often within a few days of applying.But MCA loans come at a steep price. The fees, interest rates, and repayment terms make them one of the most expensive ways to borrow money. Many business owners get caught in a debt trap, taking out additional MCAs just to pay off previous ones.If this sounds familiar, you may be wondering if consolidating your MCA loans is the solution. Here’s what you need to know about MCA loan consolidation and whether it’s your best move.
What is MCA Loan Consolidation?
MCA loan consolidation rolls multiple merchant cash advances into a single new loan. This new consolidation loan pays off your existing MCA debts. Then you make one monthly payment to the consolidation lender.Consolidating gets you out of the cycle of taking new advances to pay off old ones. Your repayment is structured as an installment loan, not a lump sum due on your next batch of credit card sales.At first glance, consolidation seems like an easy fix:
-- Make one payment instead of many
- Lower blended interest rate
- Monthly payments instead of daily withdrawals
- Pay off MCAs faster
- Improve cash flow
But it’s not quite so simple. Consolidating MCA loans has some big downsides.
The Problem with MCA Loan Consolidation
1. Consolidation Loans are Also Expensive
Most MCA consolidation loans charge high interest rates and fees. Rates often exceed 30% APR.You’ll likely pay prepayment penalties to get out of your existing MCA agreements early.When you add up interest, fees, and the payoff penalties, your total debt hardly goes down. You just trade many expensive loans for one expensive loan.
2. Risk of Re-Borrowing
After consolidation, many businesses re-borrow to supplement their cash flow.With monthly payments instead of daily debits, it’s tempting to take out additional financing. But this restarts the debt cycle.
3. Credit Score Damage
Multiple outstanding MCAs already hurt your credit. A consolidation loan adds another tradeline.Too many new accounts and inquiries cause your score to drop further. This makes future borrowing even harder.
-4. Collateral Required
Because they are high-risk, most MCA consolidation lenders require collateral. They’ll put a blanket lien on your business assets.If you default, the lender can seize your equipment, accounts receivable, etc. This puts your entire business at risk.
5. Prepayment Penalties
Early payoff penalties are common with MCA loans. When you consolidate, you have to pay these penalties, usually 1-3 months of payments.This adds to your total payoff balance. The prepayment fees can be 10-15% of your existing MCA balances.
6. Lengthy Terms
Consolidation loans stretch your repayment term from 6-12 months with an MCA to 2-4 years.You continue paying interest over this longer period. The total interest paid is often more than with your original MCA agreements.
7. Personal Guarantees Required
Consolidation lenders almost always require a personal guarantee from the business owner. This puts your personal assets at risk if the business defaults.
Alternatives to MCA Consolidation
Instead of trading MCA debt for more expensive debt, consider these options:
-Debt Restructuring
Renegotiate repayment terms with your MCA lenders directly. Many will agree to lower payments if you pay consistently. Debt restructuring avoids new fees and penalties.
Debt Settlement
Hire a lawyer to negotiate lump sum settlements with your MCA lenders. Settle for 30-50% of the balance owed. This resolves debt without taking on expensive new financing.
Debt Management Plan
Work with a non-profit credit counseling agency. They help organize payments and often negotiate lower interest rates. You avoid new loans while paying off debt.
-Business Cash Flow Loans
Explore alternative financing like business lines of credit. These provide working capital without high fees. Use funds to supplement cash flow and pay off MCAs over time.
Business Credit Cards
Finance purchases on low-rate business credit cards. Use the cards to smooth out cash flow gaps. Make consistent MCA payments from card receipts.
Increase Sales
Ramp up marketing and sales efforts. Generate enough revenue to meet MCA payments and operating expenses. Avoid new financing altogether.
Questions to Ask Before MCA Consolidation
If you do opt for consolidation, research lenders thoroughly. Compare offers and ask these key questions:
- What is the total interest rate with all fees included?
- Is there a prepayment penalty if I pay off early?
- What collateral is required for the loan?
- What are the repayment terms and withdrawal schedule?
- Is a personal guarantee required?
- Will you negotiate with my current MCA lenders?
- How much cash will I net from the new loan?
- How long have you been in business? Can I see reviews from past clients?
Avoid lenders who push you into a quick decision or don’t fully explain loan terms. Make sure consolidation clearly benefits your business finances in the long run.
How to Apply for an MCA Consolidation Loan
If you decide consolidation is your best option, here’s how to apply:
- Determine payoff amounts – Log into your MCA accounts and note current balances owed. Calculate any prepayment penalties you’ll incur.
- Gather documentation – Consolidation lenders will want to see your MCA agreements, bank statements, merchant processing statements, and financial records.
- Shop lenders – Research MCA consolidation lenders online. Compare interest rates, fees, and repayment terms.
- Complete the application – Provide the required business and personal financial information. Be ready to explain why you need to consolidate.
- Review the offer – Don’t take the first offer. Negotiate for lower rates and fees. Make sure you understand all costs.
- Close the loan – The lender will deposit the loan amount into your account once you sign the agreement. You are responsible for paying off the MCAs directly.
- Make new payments – Update your bank account to process the new automated consolidation loan payments.
Top MCA Consolidation Lenders
If you need an MCA consolidation loan, consider these top-rated lenders:
- Fundbox – Streamlined application and funding in as little as one business day. Loans up to $500K.
- Forward Financing – Consolidate up to $1 million. Loans funded in 24-48 hours.
- National Funding – Consolidate multiple MCAs. Loans up to $500K.
- Credibly – MCA consolidation loans from $10K up to $250K. Fast approvals.
- Liquid Capital – Consolidate into an affordable loan. Minimal documentation required.
- Pearl Capital – Consolidate MCAs from $75K up to $1 million. Terms up to 2 years.
The Bottom Line
Taking out additional merchant cash advances often worsens cash flow struggles. But MCA consolidation loans have their own drawbacks too.Before you consolidate, look at all options. Avoid trading unaffordable debt for more unaffordable debt.With the right alternative financing and sales strategies, you may be able to resolve MCA debt without consolidation. But if you do consolidate, research lenders thoroughly first.MCA loans provide quick funds when you need them. But they aren’t a long-term financing solution. Consolidating buys you time, but fixing the underlying business issues is key to getting out of debt.