When small business owners are stacked with MCA debt, small business owners regularly search for consolidation loans, which almost never come. In fact, seeing the small business owner stacked and with their back against the wall, MCA brokers prey on small business owners using a product called the “Reverse Consolidation.”
While a Reverse sounds revolutionary and is sold to be the last chance to help the small business owners, it could be the worst business funding product out there. In fact, few business owners ever make it through a reverse and what is scary, few understand it’s mechanics. This article explores what a reverse consolidation is and is the first part of a series of articles which explains what Reverses are, are not, and why Reverses almost never work. Furthermore, in future articles we will examine how most MCA companies and brokers have no idea what Reverses are and how they work.
By Thomas Tramaglini, Chief Operations Officer
The Center for MCA Research
When small business owners are stacked, what can they do?
So many times, we see small business owners taking a Merchant Cash Advance for a project, expansion, to make payroll, or any of numerous reasons which once taken, immediately cripple most small business owners’ ability to run their businesses. Then, to keep up, the small business owner takes on another, and another, until they are so deep in a hole, that they will do anything to get out of the hole.
This can be a brokers’ dream. Get a prospective client who has several Merchant Cash Advances and lead them to one of several MCA companies who participate in Reverse Consolidation Merchant Cash Advances.
Why would brokers send hurting small business owners to Reverses?
To Make More Money!
Simply, when a small business owner is stacked with MCAs and MCA debt, first the MCA broker will attempt to get the small business owners more MCAs. We have seen small business owners have as many as 27 MCAs and as much as $4 million MCA debt. The brokers will fund (or attempt to fund) small business owners because they will make more money off the small business owner.
However, once the broker cannot get the small business owner more MCAs, they turn to a Reverse Consolidation.
Consolidation Is Non-Existent with MCA Companies.
Once small business owners get stacked, they immediately ask for consolidation loans or SBA loans or any type of long-term funding which would lessen the hit that they have taken from their cash advances.
The issue is simple.
Few banks will give small businesses a loan, especially when they see MCAs in their portfolio. That is, the bank thinks that once a loan is going to be given the small business owner who has taken a MCA will go and get more, bringing risk to the table that leads to defaulting on the bank loan.
Further, Advances are not loans. They are purchases of future receivables by companies who are not banks. MCA companies are businesses (many with only a few people) who hedge how much money a company is going to make using a few previous months of bank statements. From what they hedge the business owner will receive in revenue, the MCA company buys a portion of those proceeds and delay payment (with massive fees) over time (short time that is).
Consolidation is Impossible
One more note, MCA companies revere that they are not loan companies. Even though they use things terms like “consolidation” and “direct lender”, MCA companies are not loan companies. Therefore, if they call or attempt to consider full consolidation, they would have to then fall into the loan servicing category, which has regulatory requirements, as well as many, many regulations which lenders like banks are subject to.
Therefore, it is impossible for MCA companies to deliver consolidation in the form of a loan. So, MCA companies basically bastardize an extra Merchant Cash Advance as a “Reverse Consolidation” product, which is packaged and sold to consolidate MCA debt as a “financing tool” which can “help… [small business owners] “remedy this stressful situation.”
We can tell you that a Reverse consolidation is NOT a consolidation product.
The Reverse Consolidation Explained.
What then, is a Reverse Consolidation?
When a consolidation loan is given, debt is typically adjoined into one loan over a longer period of time which has lower payments helping the person make payments more tolerable.
Reverse consolidations do not consolidate any money into a single loan or Merchant Cash Advance. In fact, a Reverse consolidation is just another MCA on top of the MCAs that the person already has.
In simple terms, a Reverse is an additional Merchant Cash Advance (MCA). Period.
The difference is that in a typical MCA an MCA company purchases the business’s receivables and advances immediately to business the funds in one deposit. In a Reverse consolidation, the MCA company sends the small business deposits weekly to “cover” the payments which are due to the MCA providers already in the client’s portfolio and provide some marginal space for the small business to operate. These weekly deposits will decrease over time proportionally as it is assumed that the payments the small business is already committed to will fall off when paid in full.
So, to the layperson and any hurting small business owner who is stacked with MCA debt, the Reverse consolidation presents an avenue to get out of their MCA trouble.
The Hidden Part of Reverses
So, immediately, the Reverse consolidation would seem advantageous for the small business owner. Especially if the small business owner is stacked with MCA debt.
However, the little thing which most small business owners do not see or feel until they are too late is that immediately upon the first deposit, they will begin paying the Reverse consolidation daily in the same way they were paying the other MCAs. So, while initially the business is receiving their Reverse consolidation deposits to cover the payments required by the MCA companies already in their portfolio, they are also responsible for the daily payment for the money being deposited, at the full amount.
An example:
One case active in New York Supreme Court Monroe County highlights the Reverse consolidation. In Lendora Capital, LLC v. Valle Security Texas, LLC the MCA company sued the small business and small business owner for allegedly defaulting on their Reverse consolidation.
In the contract, the client Valle Security had 5 MCAs with Lendora and Lendbug. Lendora sold a Reverse consolidation MCA to the Valle. Valle initially sold $333,000 (10.5% of receivables) with a value to be paid to Lendora of $499,167. Instead of the MCA company delivering the $333,000 that they purchased, they were to deposit the advance in parts over 25 weeks. Immediately, the client began making daily payments of $2,495.84. These payments were to be pulled 200 times, until the $499,167 was collected.
So, regardless of the positions falling off that the small business had, they were paying daily on the “Reverse consolidation.
A 20,000-foot view of the Reverse.
Without Reverse the total balance: $316,956.66 - Daily payment for all positions combined: $3,741.31.
When Client started the Reverse consolidation:
Amount of the Reverse consolidation MCA: $499,167.00 – Additional daily payment of $2,495.84.
***After Reverse consolidation MCA:
Total Balance - $816,123.66 – Beginning daily payment $6,237.15.
So, while the initial deposits are being made into the business accounts, the client is being charged based on the full amount owed. This comes to $6,237.15 – the premise is that the MCA deposits being made should keep the business afloat, and as the MCAs fall off the portfolio, the $2,495.84 being paid daily will continue until paid off.
So, while this is called a Reverse consolidation, there is NO consolidation. Just another Merchant Cash Advance over doubling the debt owed by the client and massively increasing the money that is already owed to the MCA company.
Why not full MCA up front in a Reverse consolidation?
So, to us the biggest issue we have other than the impossibility of the Reverse consolidation working based on the flawed model it is, is the fact that the business owner has sold future receivables, he or she is required to pay the full advance amount daily, but overall is given split payment for what is sold. What is unique is that while the business owner is asking for a loan, in turn they are selling future receivables to an MCA company who is allowed to make installment payments to their payments to the seller.
Why Reverse Consolidations Do NOT Work.
Why Reverse consolidations do not work is pretty simple.
When a small business owner is hurting; when their revenue is down; when they need lower payments, the answer is NOT to add debt. On the surface, getting the initial infusion of funds so the client can make their MCA payments which they cannot make seems like a good idea.
However, when one digs deeper, think about it – the client Valle Security Texas was obligated to pay $3,741.31 daily. After the Reverse, their obligation was $6,237.15 daily. The obligation to the Reverse MCA company was $2,495.84 – nearly as much as was being paid to the other MCA companies.
When companies receive the infusion of funds weekly, they replace funds which were not receivables, but purchase of potential receivables. So, as the infusions of funds diminish and the payments fall off, the payment for the Reverse does not and the client is stuck with nearly the same issue that they have had all along.
Once the threshold for what the client can pay is overcome by the Reverse payment, the business is doomed.
So What?
The team at Beacon Client Solutions regularly works with clients who have been taken advantage of by MCA companies. Specifically, those business owners who have taken on Reverse consolidation advances and burned.
As demonstrated, it is nearly impossible to see how a business owner can be struggling (which most in their predicament are) can survive the MCA Reverse.
The solution is simple. Get Help. Now.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico, and Canada.