Every type of business, whether small or large, needs financial help at one time or another to boost its working capital. While it is easy for large and established companies to obtain a loan from leading financiers, small companies do not have this privilege. Only a few small businesses get to have their loans approved from top lenders in the financial markets.
For that reason, small businesses have to seek alternative funding methods. In the end, they are left with multiple cash advances to manage. This is where reverse consolidation comes in; to help these small businesses manage the small loans and work their way out of debt.
Merchant Cash Advances
A merchant cash advance is a type of business financing that is issued on a short-term basis to help a business boost its working capital. To get this advance, the business agrees to sell some of its small future revenue to the merchant cash advance lender in exchange for some immediate cash. The loan is usually given on a term that can range between two to 24 months, depending on the amount of money the business is borrowing. The most popular terms for cash advances are usually one year.
Once the company’s working capital is boosted with the cash advance loan, the financier will collect repayments either pulling payments directly from the business's account or by splitting the business's merchant account revenue. The former is done through an Automated Clearing House.
There are several options available for business that needs merchant cash advances:
In this option, a business is enabled to pay off its several small business advances with the taking of one debt consolidation loan. Consolidating business loans helps the business to refinance its existing debts and allows it to gather all its loan payments into just a single repayment, manageable by one repayment schedule. Other than making the small loans manageable, SBA consolidation offers better loan terms to businesses such as lower rates and less frequent repayment patterns.
The idea here is to use a single SBA credit to merge all those small cash advances the business has acquired over time into a single conventional loan.
To qualify for this consolidation, the business must be lucrative, with a decent credit rating and often with an appropriate amount of business and personal collateral to secure the loan. The process to obtain an SBA consolidation loan will be between 30 and 60 days, liable to the kind of guarantee the business has.
Commercial Real-Estate Consolidation
This type of consolidation makes use of a personal or business real-estate property as collateral in acquiring a loan to combine the little cash advances a business has into one mortgage. The loan is available even for business owners that have another mortgage in place. If this is the case, the funder will look for a way to take care of the first mortgage and replace it with a larger loan, which will enable the business to make enough proceeds to consolidate all its cash advances.
To qualify for this kind of financing, the lender will first look into the business’s creditworthiness plus the value of the real estate property that the business is offering as collateral. The lender will also look into the business’s cash flow to be sure that it will be able to repay the loan. There are different commercial real-estate consolidation lenders out there today, each with a different way in which they underwrite and structure their loans and in how much they are willing to give to businesses about the value of the property offered as security.
Most of these loans have terms that can go up to 25 years, but some lenders provide a quick mortgage for a period of between 1 and ten years.
Factoring of Business’s Accounts Receivable
In business, factoring is a term that is used to refer to a transaction in which a business sells its accounts receivable, including invoices, to a third party at a discount, to acquire some immediate cash to cater for its immediate business's needs. A business may decide to use all its unpaid invoices to a funder to obtain quick cash. The factor (the company that is buying the invoices) will then transfer a good amount of the value of those invoices to the business, which then uses the money to pay off all its smaller cash advances.
This is an ideal way of acquiring a loan of a business that sells to other businesses which has a good number of unpaid invoices, has a moderate credit rating, and a business that is well established, with good profits to show for it.
Alternative cash advance consolidation
This form of financing will buy out all small cash advances a business has and replace them with one, more affordable loan with a term of between 1 and five years. Compared to small cash advances, alternative cash advance consolidation offers a more affordable loan with flexible terms. For a business to qualify for this type of financing, they need to show their profitability for at least two years. The loan lender will also need to work with a business with a good credit. The business will be required to have sufficient collateral to secure the loan.
Reverse consolidation is similar to alternative cash advance consolidation only that reverse consolidation does not rid the business’s cash advances. A reverse consolidation funder will then take care of all the costs the business incurs daily in repayment of its cash advances in exchange for a single, larger loan. The business is left to pay the reverse consolidation loan lender a portion of what it has been paying its cash advance lenders. The advantage is that the business is given a much longer repayment term than it had with the cash advances.
Understanding Reverse Consolidation
Small businesses and startups do not have many options when it comes to obtaining loans from SBA lenders and conventional banks. Since they still need some financial backing to boost their working capital, they result in alternative funding markets when top lenders fail to approve their loans. In the end, these businesses end up with small cash advances to repay.
Reverse consolidation represents a way for these small businesses to combine their numerous cash advances. With reverse consolidation, a business does not have to deal with week by week disbursement of funds to repay the small loans they owe, but in its place, only a smaller payment is required over a long period.
Reverse consolidation is a great way to help businessmen create a breathing space for their businesses by extending the repayment term and also making it easier for a business to obtain the financial support they need for their day-to-day operations. Reverse consolidation combines all the unsecured and short-term loans a business might have. This is a problem that many companies have been dealing with for a very long time, but with the solution right here, a business can have all its cash advances replaced with other loans that will lower their indebtedness.
Without consolidation, a business that is not eligible for a bank credit or any other form of secured loan may have a hard time finding a suitable loan in the financial market, thereby resulting in smaller and costlier options. Having a way out of this situation ensures that businesses can easily and quickly pay off all the other prevailing cash advance and free up to a large amount of the business' cash flow.
How does this work?
If a business has three cash advances with an obligation to make payments at least five days a week, this business may not be able to achieve much with the little income it is making every day. Reverse consolidation can be of great help to such a business by replacing the several weekly obligations to just one replacement amount, paid to the consolidation lender. With that, the business ends up spending less every day since it is no longer making everyday payments, which is now the responsibility of the reverse consolidation.
This is the best option for a business that feels overextended with small cash advances. Reverse consolidation will even allow such a business to get some additional cash, though not as much as a business can get from a traditional replacement loan. Even so, a business stands to save much money since they do not have to deal with the expensive, multiple daily payments. Again, small businesses have a better option and do not have to renew numerous cash advances that keep increases the amount of debt they have.
In a nutshell, reverse consolidation will do the following:
- Its funder will deposit money into your bank account to take care of all your cash advance payments the business has to make for that week
- The business will only need to make a single payment every week to the reverse consolidation financier, which is just a portion of what the company pays at the moment for its cash advances
- The length of time the business has to repay the money loaned by the reverse consolidation funder is longer when compared to the repayment term given by cash advance lenders. This means that the business can pay back the reverse consolidation funder after all the cash advances have been paid.
What are the Benefits of Reverse Consolidation?
Reverse consolidation comes with several benefits for a small business that is struggling to manage payments for small but several cash advances. Some of these are:
It will reduce the payments business has to make weekly
A business that has several small advances to repay has to make small payments daily or weekly to ensure that its debts are paid back on time and in full. With that, a business is left financially struggling since much of the profits it makes daily has to be used to repay the advances. Reverse consolidation helps to reduce the amount of money the business has to spend weekly. Thus, the business is left with some of its profits for advancements and to cater for its other needs. When you decide to go for reverse consolidation, your business will only be required to make a single payment, which is way less than it was paying in cash advances weekly.
Reverse consolidation gives businesses access to more cash immediately
A reverse consolidation funder will provide you with what you need every week to make the loan repayment for your cash advances with no struggle. The financier can give you all the money you need to get out of debt as quickly as you want to. This way, you will only be left with one loan to pay, which is manageable.
Reverse consolidation allows a business to bridge until it is eligible for better options
A business that is only able to borrow small cash advances is already unable to qualify for better funding such as SBA loans. In as much as cash advances are not good for business because of their short repayment term and high-interest rates, a business in need of funding will have no other options. Reverse consolidation gives such a business a chance to enjoy better financing for the time being before it can qualify for better loan options.
There are drawbacks to reverse consolidation though, and businesses have to consider both sides before making the final decision. The only disadvantages to reverse consolidation are:
- Reverse consolidation does not reduce the business's total debts but can add to it. If a business is trying to avoid adding more debts, consolidation may not help much. However, the business can manage the loans better than it could if it was only left with the cash advances.
- The business will be in debt for a much longer time and will, thus, be required to continue making payments even after clearing its debts for all cash advances. Reverse consolidation loan carries a much 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 loan.
Frequently Asked Questions About Reverse Consolidation
Reverse Consolidation is still a new thing for many small businesses, which is why we have compiled a list of frequently asked questions to help you understand how it works before you decide to venture into it. Some of the most commonly asked questions are:
How will this affect my credit?
Reverse consolidation makes it easy for a business to manage its debts, which is an excellent way to better its credit rating, if any of these were reported to any of the three credit bureaus. If a business can repay all its debts on time and as per the agreement with the lender, its credit rating gets even better. Again, a single reverse consolidation loan is easier to manage since the business only requires a small fraction of its profits every month for repayment.
How many advances can I consolidate at a time?
Reverse consolidation allows a business to consolidate multiple cash advances into a single loan. A company can consolidate between 2 and nine cash advances, as long as it can repay and secure the reverse consolidation loan. The reverse consolidation lender will consider a few factors such as the business profitability and credit rating to determine the amount of money it qualifies to get a loan. This will, in the end, determine the number of cash advances the lender can consolidate for the business.
How much can I save?
Multiple cash advances affect a business’s cash flow since much of what the business makes in profit is used to repay the small loans. With reverse consolidation, a business is only left to repay one loan with just a fraction of what it was spending on the small cash advances. In that case, a business can save up a considerable amount of its cash flow.
Find Reverse Consolidation Near Me
One of the most challenging things for a business is being able to control its debt. A business will require some form of financing at one time or the other to boost its working capital. A small business that is unable to get a good loan is left with many cash advances that they are unable to manage. Reverse consolidation is an excellent way for these businesses to control its debts. If you are in business and you want to enjoy all the benefits reverse consolidation has to offer, Wide Merchant Group may be your best bet. Call us at 800-630-4214 if you are in the Los Angeles area.