Businesses that need cash quickly but don’t have strong credit will sometimes turn to an alternative type of funding called a merchant cash advance (MCA). With an MCA, a financing company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
An MCA can be helpful for covering cash flow shortages or short-term expenses, but if you end up taking out more than one merchant cash advance, you can end up paying different (and potentially high) interest rates and fees for each. Plus, you have to deal with different payment schedules for each MCA.
A merchant cash advance consolidation is an option that lets you roll up all of those advance payments into one. Ideally, an MCA consolidation has the potential to reduce what you’re paying in interest and fees. Here’s what you need to know about this type of consolidation loan.
What Is a Merchant Cash Advance?
Not every business qualifies for a traditional bank loan. Perhaps it hasn’t been in business long enough to be eligible, or maybe it doesn’t meet the credit requirements for a small business loan. That’s when a merchant cash advance may be useful.
An MCA is not a loan, but rather an advance on future sales. To determine eligibility, MCA providers may not rely heavily on criteria like time in business and/or credit scores, but instead focus on revenues. That can make it easier to get than other types of financing.
When you get an MCA, you receive a lump sum payment. Typically, MCAs express the interest they charge as a factor rate (often ranging from 1.1 to 1.5) rather than as a percentage. The factor rate does not include any additional fees the merchant cash advance company may charge you, such as administrative or underwriting fees.
The repayment on an MCA works differently than other types of business loans. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance is repaid in full. Repayment periods can range anywhere from three to 18 months. Generally, the more you make in credit card sales, the faster you’ll repay the advance.
The downside is that, when it comes to conventional vs. Small Business Administration (SBA) loans vs. merchant cash advances, MCAs tend to have much higher fees and interest rates than the other two, making them a costly financing option.
Indeed, when you convert factor rates plus fees into an annual percentage rate (APR), the APRs on merchant cash advances can run as high as 350%, depending on the lender, size of the advance, fees, business revenue, and how long it takes to repay the advance.
What Is Merchant Cash Advance Consolidation?
A small business owner might take out a merchant cash advance to see their way through a slow period, then, when they struggle with repayments, apply for another MCA to help repay the first. This is a process known as loan stacking. The company could then end up with multiple repayment schedules and paying different factor rates and different amounts for each advance.
A merchant cash advance consolidation rolls multiple MCAs into. a single new loan. The consolidation loan typically pays off your existing MCAs and allows you to make one payment, often monthly, to the consolidation lender. Ideally, the consolidation loan will have a lower interest rate than the average your business was paying on the multiple advances.
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When to Consider Merchant Cash Advance Consolidation
If your business has taken out multiple merchant cash advances, you may be able to save money with a merchant cash advance consolidation loan. You’ll also be able to simplify repayment by having a single automatic debit rather than multiple payments taking place at different times and for different amounts. This can make it easier to predict and budget for repayments.
But there are a few things to consider before you jump into MCA consolidation. One is whether or not your existing MCA lenders will charge you a prepayment penalty fee if you pay off your advances early. You’ll also want to find out if there are any upfront fees you have to pay for the new consolidation loan, since this can eat into your savings.
If, after running all the numbers, it looks like you can save money and streamline repayment, it may be a good time to consider a merchant cash advance consolidation.
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What to Consider With Merchant Cash Advance Consolidation
Before applying for a consolidation loan, you’ll want to look at what you’re currently paying in interest and what you’d qualify for with a new loan. Also consider any fees for the new loan and any payoff penalties you’ll owe your current lenders. If, once you crunch the numbers, your total debt hardly goes down, there’s probably no sense in taking on a new consolidation loan.
When deciding whether it makes sense to do an MCA consolidation, you also want to look at the repayment period and what your payments with the new loan will be. A shorter repayment period can mean larger payments that you might not be able to afford. And, while a longer repayment period can mean smaller payments, it will likely mean paying more in total interest.
Examining the options can help you find the best path forward for your business.
Refinancing vs Consolidation
If you’ve heard of business loan refinancing, you may think it’s the same as merchant cash advance consolidation, but these aren’t exactly the same.
It’s true that both can potentially lower your interest rate and/or lengthen your payment term. However, when you refinance, you’re replacing one MCA with a new one or with a small business term loan. When you opt for an MCA consolidation, you’re rolling multiple MCAs into a new MCA or other type of business loan.
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Types of Consolidation Loans
There are a few types of cash advances and loans you can use for consolidation, depending on what you qualify for.
Lenders may have different approaches to help you with consolidating your loans. Some will buy out the loan and pay it off directly, while others will lend you the money, after which it’s your responsibility to pay off your existing MCAs.
Merchant Cash Advance
If you’ve taken out multiple MCAs, it’s likely because your business doesn’t have great credit and may not qualify for other types of loans. If that’s the case, you might consider a new, larger merchant cash advance to consolidate your existing MCAs, ideally with more favorable terms.
Be aware that you will likely have a short repayment period, perhaps between a few months and three years.
Online Lenders
Another consolidation option if you don’t have excellent credit is taking out a consolidation loan with an online lender. Interest rates may be lower than with a merchant cash advance, and repayment terms may be longer.
SBA Loans
SBA loans like the 7(a) program can be used to consolidate business debt that is approved by your lender, if you qualify. Repayment terms can be up to 25 years, and rates on SBA loans are among the lowest of any financing option for businesses.
Traditional Bank Loans
If you’ve been able to build your business or personal credit since taking out the MCAs, you may qualify for a bank loan with lower rates and longer repayment terms. You can then use the proceeds of the loan to pay off your existing MCAs.
The Takeaway
If you feel like you’re drowning because you’re paying too much, too often, for multiple merchant cash advances, consolidating with a new advance or small business loan might be a solution that could help you lower your costs and roll everything up into one monthly payment.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
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