Getting a loan in the business sector is never new. In fact, there can only be a handful of businesses that have not tried securing a loan. A company will eventually look for additional funding for expansion, inventory, cash flow, or equipment purchases.
When companies already have secured the loan. Here comes the challenge of repaying it on schedule. In some cases, some fail to do so. Consequently, companies might have to get another loan to cover the repayments. In the long run, business owners might realize that they have been getting loans here and there. It could lead to future financial struggles.
However, there are ways a company can keep up with multiple repayments through reverse consolidation. This article will explain how this works, its benefits, and why it’s a good solution for companies.
Reverse Consolidation defined
A reverse consolidation is a merchant cash advance or a loan that can help businesses with an already stacked number of advances. Once your business agrees to a reverse consolidation, a lender will provide your company with a new loan or MCA. The new loan will help you afford daily or weekly MCA repayments.
Generally, the MCA offered through the reverse consolidation financial institution is for a more considerable sum of money and is advanced in increments with a longer duration than the company’s current MCA repayment schedule. In context, the business will have a cash infusion weekly more than what is due to the current MCA lenders.
Additionally, it is worth noting that an MCA consolidation does not reduce the amount the company owes nor consolidate any outstanding MCAs. Instead, it will help repayments be more manageable in the short term. Additionally, businesses must also remember that doing so will technically add another MCA to their plate. However, the payment duration will be more extended than most short-term merchant cash advances.
Essentially, a reverse consolidation is a business loan to cover daily payments owed from existing MCA lenders. As previously mentioned, businesses do not technically get rid of the advances in one blink. The idea here is a company secures a reverse consolidation loan and exchanges the frequent MCA repayment schedules with a larger loan. Additionally, the larger loan has a longer repayment duration and smaller amounts in repayments.
While it does not entirely wipe out the loan right away, MCA consolidation loans help businesses pay off their MCA obligations. At the same time, they will not bear the pressure and stress brought by juggling various MCA repayment schedules all at once. In reality, the business must still pay back the reverse consolidation creditor. However, this time, borrowers will have less anxiety than paying back multiple MCAs.
What is an MCA?
A merchant cash advance is a kind of business funding issued on a short-term basis. MCAs allow companies to boost their working capital. The borrower agrees to sell a percentage of the business’s future revenue to an MCA lender. In exchange, they will get cash. In most cases, an MCA lender gives approximately 24 months for the loan term. However, it will also depend on how much the borrower gets from the loan. The most common term in MCA is one year.
Once the business’s working capital is boosted using the MCA funding, the lender will then collect repayments. They can pull payments straight from the business’s account or split its revenue.
Why do businesses get an MCA?
In most cases, small businesses turn to merchant cash advances for immediate funding. Here are some specific reasons why most companies choose MCAs, especially when they are not yet eligible for business loans.
Lenders generally release the lump sum quickly. When a business applies for cash advances, it will only have to wait for a few days instead of more than a week. Lenders will directly deposit the cash into the account. Timing is critical for any successful business, and an enhanced cash flow will be beneficial.
Applicants need not have a good credit score. In general, the probability of getting an MCA is higher than a loan or even a credit card. Most lenders implement a straightforward application and allow online applications. One of the essential requirements of an MCA is for businesses to guarantee a specific amount in monthly credit card sales. An MCA is a good option for companies making excellent credit card sales.
Borrowers do not have fixed repayment amounts. Also, merchant cash advances are technically not a loan. Businesses do not follow sets of monthly payments. Additionally, lenders do not necessarily provide repayment terms. Instead, the borrowers agree to get a lump sum in exchange for a part of the future credit card sales. In essence, a business is selling a portion of its future profits. During slower months, they can remit smaller amounts.
Businesses can use the funding for whatever purpose. Suppose you have tried other funding options; you would know they are intended for specific purposes. For example, equipment financing is for those looking to purchase equipment for their business. With the restrictions on where to spend the cash, finding funding that can meet all the business’s needs can be a handful. That is why MCAs are very popular. Once the borrower gets the cash, they have the freedom to use them however they like.
Assets and credit ratings are technically not at risk. Besides the restrictions, other financing options risk the business’s credit health. If the company fails to repay the loan or defaults, it will obviously affect the business’s credit score. Since an MCA is a cash advance, one does not need a high credit score to get funded. Cash advances involve selling for future revenues; hence the business does not need to prove its worth with a 750-credit score. Additionally, assets are not involved in this financing, so you will not have problems risking your properties.
Reverse consolidation and Merchant Cash Advances
An MCA consolidation works similarly to any other kind of consolidation. It generally provides the business with enough weekly cash to pay off the existing advances. However, one must also consider the possible drawbacks when choosing reverse consolidation.
For most financial providers and lenders, getting an MCA reverse consolidation relieves businesses from debt. This is especially beneficial if they have a handful of advances on their plate. Also, an MCA consolidation only works for companies who have taken out an MCA. In simpler words, the loan clumps all the MCAs together into one.
For new businesses venturing into this kind of loan, it can be a handful to understand the terms. Hence it can be beneficial to reach out to financial advisors. Booster Financial guarantees to provide options for its clients opting to get an MCA reverse consolidation.
More importantly, getting a consolidation loan from a similar lender where the business secured an MCA is beneficial. This way, it eases the repayment schedules. Remember that an MCA and reverse consolidation are two different kinds of loans. Having the same financial provider for the two makes it easier for businesses to agree on various loan terms.
Reverse consolidation vs. regular consolidation
Regular consolidation and reverse consolidation are both used to help borrowers pay back cash advances. However, they vary in a significant aspect. With reverse consolidation, businesses still need to pay back the MCA lender. Meanwhile, in loans involving regular consolidation, the lender will provide funding for the business to pay off the existing loans all at once. Consequently, the company will incur a new loan with a consolidation lender instead of the MCA funder.
There are some specific advantages reverse consolidation brings to businesses opting for this type of loan.
Less weekly payments. Businesses using MCA consolidation reduce the weekly repayments since the lender will technically assume the debt and pay back the MCA lender.
More access to funding. Suppose the business has multiple MCAs to pay back daily or weekly; it can affect the cash flow since reverse consolidation lenders infuse the funds to repay MCAs. This allows a more consistent flow of cash and cash on hand for the business.
Bridge for more effective options. It can be challenging for businesses to secure traditional loans if they have multiple pending MCAs. Additionally, the shorter repayment terms and higher interest rates can be challenging to keep up with. The reverse consolidation loan will allow companies to receive more funding in the meantime; until such time that the situation permits them to qualify for better funding options.
Before you decide to get an MCA consolidation loan, considering some disadvantages can also be beneficial. This way, you can compare whether this option is ideal for your business.
It does not consolidate the payments. Indeed, the loan can provide cash to pay existing advances. However, reverse consolidation does not pay off debts in one payment.
Reverse consolidation loans do not reduce debt. One of the good things about reverse consolidation loans is that they provide breathing room for businesses to boost cash flow and prevent loan defaults. However, it’s worth noting that they do not reduce the business’s debt.
The terms are generally longer. While most MCA terms are shorter, reverse consolidation implements much longer ones. After the initial infusion of capital, the company has to bear the additional load of reverse consolidation payments. The additional payment and the extended loan term might prevent businesses from getting more loans.
The business will typically pay more with reverse consolidation. In essence, you can expect to owe more money than what you primarily sought to borrow. In most cases, lenders offering reverse consolidation will require every borrower to sign a contract obligating the business to repay a much more significant sum of money than the business will ever receive.
Where to get reverse consolidation?
As previously mentioned, getting reverse consolidation loans from the same lender where the business got merchant cash advances can be beneficial. This way, it eases the burden of considering all loan terms. Additionally, every lender implements different terms, and opting for other lenders might only complicate things for your business along the way.
Booster Financial is one of those financial institutions which offers various loan options for businesses to choose from. The application is straightforward and does not require too many documents when applying. Furthermore, there are financial advisors whom companies can talk to before deciding to get funding.
Other MCA consolidation options
Besides reverse consolidation, there are also a few consolidation options that MCA borrowers can consider.
SBA consolidation. This funding option allows businesses to pay off multiple cash advances while taking one debt consolidation loan. Like reverse consolidation, an SBA loan helps companies refinance existing loans and gather all the loan payments into one repayment. Additionally, they are manageable by a single repayment schedule. Furthermore, with SBA, businesses can have better loan terms like lesser repayment patterns and lower rates. The concern with SBA consolidation loans is that a business needs a considerable credit rating and collateral to secure the loan. These factors can be too much for small businesses with poor credit ratings.
Commercial real-estate. Similar to an SBA consolidation, commercial real-estate consolidation involves a real property as collateral. In exchange, the business can acquire a loan to combine all the cash advances into one mortgage. Additionally, companies can avail themselves of this option even if they have other mortgages in place. If this happens, the consolidation funder will look for ways to take care of the first mortgage. They will eventually replace it with a larger loan. In qualifying for the loan, the lender will look at the company’s creditworthiness and the property value of the collateral. Other than that, lenders will typically inspect the consistency of the borrower’s cash flow to ensure that they can repay the consolidation loan. The terms can take as long as 25 years. However, there are those offering loan terms between one and ten years.
Accounts receivable factoring. Factoring means businesses sell their accounts receivables and invoices to third-party funders at a discount. This, in turn, will provide them with immediate cash to cover immediate needs in the business. Also, the company can decide to use all the unpaid invoices to obtain quick cash. Once the cash is disbursed to the borrower, the business can use the money to repay multiple cash advances.
Alternative cash advances consolidation. This consolidation option offers affordable rates and terms between one and five years. Unlike small cash advances, an alternative cash advance consolidation loan buys out cash advances and replaces them with a single affordable loan with flexible terms. To qualify for this consolidation loan, a business has to prove its profitability for a minimum of two years. In most cases, lenders prefer to work with businesses having good credit. More importantly, it will still involve collateral to secure the loan.
Is reverse consolidation ideal for all businesses?
It surely can be a handful to consider all the options for your business to cover multiple cash advances. While all of them benefit the business, reverse consolidation on MCAs is more ideal since they do not need collateral. Consolidation loan lenders will only need a percentage of the future revenues as repayments.
Regardless of which option one chooses for their business, it is essentially ideal for borrowers to assess which among them can bring the utmost benefits. After all, the primary goal is to fund existing cash advances, not to affect the consistency in cash flow and other business operations.
Ways to improve the chances of getting better loans in the future?
While a reverse consolidation can be helpful to cover multiple cash advances, there will be instances when the business needs to apply for another loan. Consolidation loans can be a great stepping stone to improving one’s credit rating.
Improve personal credit. In some cases, lenders might ask for personal credit apart from business credit. To keep your personal credit healthy, it can be beneficial to keep your credit balance low, pay debts on time, and only open credit lines when you need them. More importantly, it can be ideal for you to check on your credit score from time to time. This way, you can monitor whether you are still on the healthy track or not.
Build your business credit. Establishing one’s business credit can be about incorporating the business, getting lines of credit, opening bank accounts, or getting a federal tax ID number. Additionally, applying for and handling business loans can also affect your business credit. Hence, you must ensure you pay business loans on time to avoid red flags on your credit score.
Strengthen your creditworthiness. The way one treats loan repayments will reflect on the creditworthiness. As businesses take out loans, they gradually prove their capabilities to pay off loans. Remember to make repayments on time and avoid defaulting on loans. If not done well, these two factors can affect your business’s creditworthiness. While there might be lenders who accommodate borrowers with bad credit history, getting a larger loan will be challenging with poor credit.
Vary your financing options. Similar to getting creative with your marketing campaigns, varying your funding option can also help one’s creditworthiness. The first business loan might not cover all business operations. However, it is from there that you get to explore more funding options once you have paid off the first loan. As you get into different loans and religiously pay them off, you send signals to lenders that your business is reliable enough to pay off loans. As you venture into more business loans, you are providing growth for your business. At the same time, you’re establishing your creditworthiness for larger loans.
How will the reverse consolidation affect one’s credit?
In most cases, businesses use reverse consolidation to manage their debts and better their credit ratings. Suppose the lender repays their debts on time according to the agreed-upon schedules and terms, and their credit ratings get even better. More importantly, a reverse consolidation is easier to manage since businesses only need a small portion of the profits for the monthly repayments.
How many cash advances can businesses consolidate at a time?
Companies can consolidate between two and nine merchant cash advances, given that they can repay and secure the consolidation loan. As for lenders, they will consider factors like credit rating and business profitability to identify the amount of cash the business qualifies to get the loan. In the same way, these factors will determine the number of cash advances a company can consolidate in a single loan.
Can businesses save from using MCA consolidation?
In general, businesses can save up a significant amount of their cash flow. In essence, multiple cash advances affect the company’s cash flow since the profit from the business is used to repay the advances. With reverse consolidation, a business only needs to pay a single loan. However, unlike cash advances, consolidation loans have longer terms.
What’s the best lender for reverse consolidation?
It will depend on the options lenders provide for businesses. Hence, as someone looking for reverse consolidation loans, it is necessary to assess every lender and check their offers and opportunities. After all, their services need to fit the borrower’s needs. As a business, you do not want to engage and commit to loans without getting the most out of their services.
When is a reverse consolidation necessary?
You can turn to MCA consolidation if your business has numerous cash advances to minimize your number of debts before taking out another business loan.
Does one need a high credit score to get a reverse consolidation?
The good thing about MCA consolidation is that businesses do not necessarily have a good credit score. Companies can apply for funding even with poor credit history. However, higher credit scores allow access to better financing options with lower interest rates. You can discuss your options with Booster Financial, so your business can get the proper funding and loan terms.
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