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MCA Reverse Consolidation 101: The What, Why and How of Reverse Consolidations in Merchant Cash Advance
By David Roitblat
Reverse consolidation is a significant plank of the MCA industry.
When merchants fall behind on the payment plans to multiple funders, their chances of paying back that growing sum rapidly diminish. To help them remedy this stressful situation, some companies offer reverse consolidation to assist the client in this mess.
How does an MCA reverse consolidation work?
When a businessperson or merchant owes MCA funders payments for multiple cash advances that they cannot pay back, the mounting debts can be impossible to keep up with as daily withdrawals eat a crippling large portion of the business's income.
When this happens, an MCA funder will offer this merchant one large advance that covers all their debts, with additional funds for the merchant to have on the side to grow and live. This is called a reverse consolidation, turning multiple debts into one consolidated sum, and is done to help the merchant make their payments manageable and have enough money to develop the business and emerge from its current position.
The reverse consolidation lender will make deposits into the merchant's account, first larger amounts and then smaller sums, as the debts get paid off. This is because the payments are made on a first-in/first-out basis: the funder with the longest outstanding advance gets paid first in full, then the next one, and the one after that, until they are all accounted for and the debt is cleared, or according to the unique terms of each deal (older deals may have a longer term, and more recent deals might have a more expedited timeline).
They also add funds to give the business some breathing room, with extended timelines and smaller repayments.
The easiest way to think of a reverse consolidation on a merchant cash advance is that it takes multiple owed payments and turns them into a single, larger advance with a longer repayment period with small repayment amounts.
What are the benefits of reverse consolidation for a merchant?
Here are five benefits of taking a reverse consolidation:
- Reduces the number of weekly payments: Each week or month, the reverse consolidation lender deposits a sum into the merchant’s bank account for the cash advance lenders to take their withdrawals from. The merchant doesn’t have to worry about having enough to cover them all – all they have to do is pay the reverse consolidation lender. If cash flow concerns have been a stress for them until now, this can be a huge relief.
- Extended repayment terms and smaller payments: Instead of having to worry about meeting the strict timetables imposed by multiple lenders, businesses can now rest assured knowing that their terms are manageable and negotiable with one funder. Additionally, reverse consolidation funders are often more willing to work with their merchant partners on a more sustainable payment plan, so taking out a reverse consolidation can typically lower payments by 40% to 60%.
- Gives businesses more access to cash: Often, reverse consolidation lenders will ensure the merchant they are assisting is being helped with their cash flow concerns by offering additional funds on top of their existing debt, to help them move out of their current position.
- Focus on growing the business instead of drowning with it: This means no more weekly repayments on multiple debts- just one single payment each week. That can be an immense relief for any business and allows them more time and money to focus on other aspects of their operations. It's impossible to concentrate on growing or investing in your business when so much of its profit is being taken every day, so a reverse consolidation might be the perfect way to bring some breathing room into your business and give it the financial support it needs.
- Avoid penalties on existing debt: If you have penalties associated with your existing debt, you can feel stuck with payments that are hurting your business. With a reverse consolidation, you get some relief while avoiding those penalties.
What To Consider Before Taking A Reverse Consolidation:
- Merchants must understand that reverse consolidation does not reduce the business's total debts but adds one large one intended to cover the rest. If a business is trying to avoid adding more debts, consolidation may not help much. However, the business can manage its existing payments much better with a reverse consolidation than it could if it was only left with the cash advances.
- The business will be in debt for a longer time with a reverse consolidation than with just the cash advances and will continue making payments even after clearing its debts for all existing advances. A reverse consolidation advance carries a longer term, and even though the business will be making a small payment at a time, the business remains in debt for the period of the term.
The Issues and Solutions for MCA Reverse Consolidation Lenders:
The issue with offering reverse consolidation is that they can be incredibly difficult to track for the MCA company making the payments on a macro and micro scale.
It’s important for funders to be able to track the reverse consolidation deal as a whole, as well as on a deal-by-deal basis, in order to truly provide a borrower and the funders with the best possible outcome.
Funders need to be able to look at the total deal and understand multiple factors: What is the complete value of the reverse consolidation offer to the lender? How much are we invested with this merchant? Are they meeting their payments?
Arguably a more daunting and necessary task, funders also need to understand the unique tranches and sub-deals in each reverse consolidation and the arrangements and parameters of each individual cash advance that has been consolidated: How much has already been paid to which funder? What are the payment amounts? Were any discounts arranged? What fees is the funder paying and what fees did the merchant agree to? What are the payment timelines and factor rate? These are only some of the details a company needs to account for when tracking the deal.
Once upon a time, companies offering reverse consolidation had to do this all manually, because there was no software or platforms to do it for them. With the advent of spreadsheet programs, they’d create (or have their accountants like Better Accounting Solutions) cumbersome and custom Excel calculators, with unique formulas and makeups and then do that on a deal-by-deal basis, but that work had to be done because it is imperative to be able to look at each deal is progressing on its own.
Companies like Orgmeter changed all that:
Businesses of all sizes in the merchant cash advance space had been looking for an effective way to track reverse consolidation for their clients which, until their inception, had been a slow and tedious process that required manual management and often resulted in costly errors.
Now, those same companies are using software solutions like Orgmeter to take the total owed balance of an entire portfolio, divide it into its respective sub-deals, and then aggregate each one on its own. This makes it easier to identify which deals are performing well and which ones may need additional attention or monitoring.
Orgmeter allows its users to break down their deals automatically into sub-deals and accounts for them in their unique “tranche creator”. When you put in the inputs laying out the parameters of each deal, you can quickly access and look over your weekly payments, share with your ISO shops and merchants, and much more.
It also helps you look at the deal on a global and individual level, making sub-deals, formerly the hardest to track, now easy. You can look at the whole group or deal by deal, gross and individual totals, to-date and outstanding payments and so much more. The system accounts for first in first out, reading the tranch, and only moving on when is fully paid, and can create custom reports to help you quickly gather the data you need to make smart and informed choices for your business. Orgmeter is uniquely customer oriented and clearly values its partner's feedback for future features and integrations. It’s why they are among the largest and fastest-growing software solutions in the MCA space, making clients’ lives easier by saving time, money, and resources while giving their customers the best service imaginable.
Reverse consolidation simplifies complexities and stress for merchants in the MCA space. To understand if reverse consolidation is the right option for you, and to see how Better Accounting Solutions can help your business take the next step forward, visit betteraccountingsolutions.com or reach out to david@betteraccountingsolutions.com.
David Roitblat is the founder and CEO of Better Accounting Solutions, an accounting firm based in New York City, and a leading authority in specialized accounting for merchant cash advance companies.
To connect with David, email david@betteraccountingsolutions.com.
