MCA consolidation: when it helps and when it is a bigger MCA

When three payments are draining the account, one lower payment sounds like rescue. Sometimes it is. Sometimes you have swapped three small problems for one big one.

How it works

In a consolidation advance, a new funder (or one of the existing ones) offers a larger advance. Part of that money is sent directly to the funders you already owe, to pay them off. The new funder then collects from you instead, through one daily or weekly debit. Some offers include extra cash for the business. Many take an origination fee out of the advance first.

The sales pitch is simple: one payment, lower payment, fewer calls. The question to ask is different: what is the total I will pay, and for how long? Compare it with your total remaining on the old positions, using the same method you would use for any factor rate.

A worked example

Say you have three open positions. Each has 20 weeks left. Together they take $6,250 a week and have $125,000 still to pay. A consolidation offer arrives. The new funder will advance $150,000, use it to pay off all three, take a 4% fee, and send the rest to you. The new payback is 1.40 times the advance, spread over 40 weeks.

Invented numbers for illustration. Real offers may have different fees, payoff figures (an old funder may agree to take less, or more) and terms. Work through your own with the actual payoff letters.

Reading the numbers

• The weekly payment falls from $6,250 to $5,250. That is the relief, and it is real.
• The time stretches. The old balances would have ended in 20 weeks. The new advance runs 40.
• The total grows. You pay $210,000 instead of $125,000, which is $85,000 more, in exchange for $19,000 of new cash and the lower payment.
• The cost of the new money is high. Counting the fee, the cash you actually receive for the new advance is $144,000, and you pay back $210,000. That works out to about 103% a year if you treat it like a loan. See Factor rate vs. APR for why the same factor looks bigger over a short time.

The extra $85,000 is not only the price of the $19,000 in new cash. It is also the price of stretching the payment out. That is the part that is easy to miss.

One more check is worth doing. Add up what you will have paid the old funders by the time they would have been finished, then add what you pay the new funder in the same period. Put them side by side by week: in weeks 1 to 20 you pay less than before, and in weeks 21 to 40 you pay something that did not exist before. The new advance is only a good trade if what you do with the extra cash and the extra breathing room earns more than that added cost. If the cash is simply used to cover the next gap, the same problem can come back with a bigger balance behind it.

It is also worth asking whether any of the old funders would reconcile or modify first. A lower payment from an existing funder, or a reconciliation based on your actual sales, may solve the payment problem without a new advance at all. See How MCA reconciliation works.

When it can help

• The total cost is lower than your other realistic options, such as a modification, a bank refinance or paying off one position early.
• The new payment is something your sales can support at the specified percentage, with room to spare.
• You get clear payoff letters for the old positions and proof that each one is closed.
• The agreement has a reconciliation clause you have read and understand.

When it is just a bigger MCA

• The offer talks only about the payment and never gives you the total payback.
• Fees are unclear, or taken out of the advance without a clear list.
• The new term is much longer, and you are likely to need another advance before it ends. See Stacking and renewals.
• The funder asks for a bigger lien (all assets) or a stronger personal guaranty than before. See The personal guaranty in your MCA.
• The pitch pushes you to decide the same day.

Questions to ask

1. What is the total I will pay back, in dollars, and by what date does it end?
2. What is the factor rate, and what fees come out of the advance? Please list each one.
3. Which positions are being paid off, for what exact amounts, and when?
4. Will I get written confirmation from each old funder that my account is paid in full, and that its lien (if any) will be ended?
5. Is there a reconciliation clause? Where does it say that, and how do I ask?
6. Is there a penalty or discount for paying it off early?
7. Is there a personal guaranty, and what kind?
8. Does this deal count as a renewal that carries over any unpaid balance or fees?

Education only, not legal advice. Agreements differ; your contract's exact wording controls.