Clients often find themselves overwhelmed by their alternative loans and merchant cash advances due to being stacked beyond their limits. This situation occurs frequently when dealing with brokers and MCA predators.
So, what can someone do? Brokers and MCA companies have a great product to offer: 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. In this article, we delve into the concept of reverse consolidation and their brutal consequences.
By Thomas Tramaglini, Chief Operations Officer
The Center for MCA Research
When small business owners are stacked, what can they do?
Often, small business owners opt for a Merchant Cash Advance to fund projects, expansions, cover payroll, or for various other reasons. However, this decision can quickly hinder their ability to effectively manage their businesses. Subsequently, in an effort to stay afloat, they end up taking on additional advances, leading them into a situation where they feel desperate to escape the financial burden.
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!
Basically, when a small business owner is burdened with MCAs and MCA debt, the MCA broker will initially try to provide more MCAs to the small business owners. We have witnessed instances where small business owners have accumulated up to 27 MCAs and owed as much as $4 million in MCA debt. The brokers will finance (or try to finance) small business owners since they stand to profit more from them.
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.
When small business owners face financial difficulties, they often seek consolidation loans, SBA loans, or other forms of long-term funding to mitigate the impact of cash advances they have received.
The situation is straightforward.
Many banks are hesitant to provide loans to small businesses, especially if they already have merchant cash advances (MCAs) in their financial records. The concern is that granting a loan to a small business owner who has taken an MCA might lead to further borrowing, increasing the risk of default on the bank loan.
Furthermore, it is important to note that advances are distinct from traditional loans. They involve the purchase of future receivables by non-bank companies, such as MCA providers. These companies, often small operations, assess a business's earning potential based on recent bank statements. They then purchase a portion of those anticipated proceeds, charging substantial fees and delaying repayment over a short period.
Consolidation is Not Possible - Ever.
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?
Consolidation loans combine debts into a single loan with lower payments over an extended period, making it easier for the borrower to manage payments.
Reverse consolidations, on the other hand, do not merge debts into a single loan or Merchant Cash Advance. Instead, they add another MCA on top of existing MCAs.
In essence, a Reverse consolidation is simply an additional Merchant Cash Advance (MCA).
In a standard MCA, a company buys a business's receivables and provides immediate funding in one lump sum. However, in a Reverse consolidation, the MCA company makes weekly deposits to cover existing MCA payments and allow some breathing room for the business to operate. These weekly deposits gradually decrease as the business pays off its existing commitments.
For small business owners struggling with MCA debt, a Reverse consolidation offers a way out of their financial difficulties.
The Deadliest Loan Product that is NOT a Loan: The Reverse.
So, immediately, the Reverse consolidation would seem advantageous for the small business owner. Especially if the small business owner is stacked with MCA debt.
Nevertheless, what many small business owners fail to realize until it's too late is that once they make their first deposit, they will immediately start paying the Reverse consolidation on a daily basis, just like they were paying their other MCAs. Initially, the business may use the Reverse consolidation deposits to meet the payment obligations of existing MCA companies, but they must also make daily payments for the deposited amount in full.
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 facing financial difficulties, such as decreased revenue and the need for lower payments, taking on additional debt is not the solution. Initially, it may seem beneficial to secure funds to cover MCA payments that cannot be met by the client.
However, upon closer examination, consider this – Valle Security Texas was originally required to pay $3,741.31 daily. After opting for the Reverse, their daily obligation increased to $6,237.15. The Reverse MCA company demanded $2,495.84 in payments, which was nearly equivalent to what was owed to other MCA companies.
By receiving weekly injections of funds, companies are essentially replacing non-receivable funds with the purchase of potential receivables. Consequently, as the funding decreases and payments dwindle, the Reverse payment remains constant, leaving the client in a situation similar to their initial struggle.
Once the Reverse payment surpasses the client's affordability threshold, the business is left in an unsustainable position.
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.
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.
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