woman looking over merchant cash advance agreement

Should I Consolidate or Refinance a Merchant Cash Advance?

Businesses that have received one or more cash advances to obtain working capital may need to consolidate or refinance expensive merchant cash advance debt. Determining which option is best for you requires the advice of an experienced debt relief specialist.

Why Businesses Need to Consolidate Merchant Cash Advances

Small businesses that do not qualify for traditional funding often take merchant cash advances. While this trend started after the 2008 financial crisis when money center banks stopped lending to small businesses, thousands of companies have taken MCAs during the Covid-19 pandemic.

While MCAs provide businesses with working capital to meet payroll, restore inventory, and cover unexpected expenses, the cost of capital is typically higher than 30 percent; payback terms are short, often less than 12 months. In some ways, a merchant cash advance is akin to a payday loan, but here the business puts future receivables on the line to repay the advance. 

Once the money is used, however, businesses often obtain another MCA to pay for the daily or weekly automatic payments of the first merchant cash advance, and things can quickly spiral out of control. But businesses have options, such as a business debt consolidation or a refinance that can help to eliminate the merchant cash advance debt.

What is Business Debt Consolidation?

A debt consolidation loan can help to pay off your business debt, including merchant cash advances. Business debt consolidation is similar to personal debt consolidation in that business debts are moved or consolidated into one loan. The benefits of consolidating business debt include:

  • A lower interest rate – A business debt consolidation can result in a lower interest rate, which means you’ll pay less to service the debt over time.
  • Streamlined payments – Business debt consolidation streamlines multiple monthly payments into a single payment, making it easier to manage your debt and helping to avoid missing payments or paying late.
  • Better credit rating – Consolidating business debt will improve your cash flow, allow you to stay current on payments, and help to raise your business credit score.

But it is important to remember that a business debt consolidation does not eliminate any debt, only moves it to a new loan. In addition, by taking a consolidation loan, you are starting a new loan, and the term may be longer than the debt you are consolidating. You may also end up paying more in interest over time, even if your interest rate is lower.

Refinancing an MCA is Another Option

If a business consolidation loan is not workable, refinancing an MCA is another option. 

A refinance differs from a business debt consolidation loan in that you can refinance a single loan with a better interest rate rather than combining multiple loans. This may be a better option if you only have one merchant cash advance.

Reconcile Your Merchant Cash Advance

Before you consider consolidation or reconciling a merchant cash advance, look to the MCA agreement. A properly structured agreement will include a reconciliation clause that requires the funder to restructure the payment plan in the event of a receivables shortfall. 

However, you must notify the MCA provider of a shortfall and prove that your business will return to profitability. By contacting and working with a capable debt relief specialist, you can explore all your options for getting out of merchant cash advance debt.