Should You Refinance Your Merchant Cash Advance? How?

Summary: Companies that struggle with their merchant cash advance (MCA) debt often consider using debt refinancing or consolidation. They anticipate that this option will solve their financial problems.

However, the decision to refinance debt isn’t easy. Using the wrong product to refinance your debt can leave you worse off. If done incorrectly, it could lead to the failure of your business.

In this article, you learn the following:

1. The problem with cash advances
2. Should you refinance your cash advance
3. Why you should never use a cash advance to refinance debt
4. The right way to refinance merchant cash advances
5. Qualification requirements

1. The problem with cash advances

Companies that use merchant cash advances, also called cash advances, often encounter two major problems. The loan costs a lot of money and companies use their cash advances incorrectly. Consequently, they often end up with a financial problem.

Things get worse if the company tries to solve their financial problem by getting a second cash advance. Most companies don’t use the new advance to pay off the first MCA. Instead, they use the funds to operate the business keep up with the payments for both advances. This situation is called “stacking.”

This scenario can repeat itself, as the company gets a third or fourth cash advance. Stacking MCAs seldom works as intended. Sadly, it often leads to an financial tailspin. We see this situation often.

2. Should you refinance your cash advance?

The decision to finance a cash advance isn’t always clear cut. It depends on your company’s financial health, its future prospects, and your debt load. Generally, you should refinance your cash advances only if all of the following are true:

1. Your weekly payments are causing financial problems
2. You can get a new loan with terms that work for your business
3. The total cost of refinancing won’t exceed the total savings

If your transaction cannot meet these three criteria, consider alternatives. Otherwise, refinancing may actually leave you worse off. Learn more about the advantages/disadvantages of consolidating debt.

Companies that are struggling with debt of any kind, including MCAs, should consult a CPA or similar professional. They can advise you of your options and suggest viable alternatives for your company.

3. Don’t refinance cash advances with another MCA

Companies that can’t afford the cash advance’s weekly payment sometimes try to consolidate multiple advances with a single larger cash advance. The new cash advance often has a longer payment term. The longer term allows the lender to provide a lower weekly (or monthly) payment. However, the new loan often have a higher factor rate. They still very expensive and seldom a good deal. Here is why:

a) You pay some financing costs twice

Conventional loans are amortized. The monthly payment is fixed and is used to pay a portion of the interest and principal. You can choose to pay the principal at any time without owing additional interest. This last point is key.

Cash advances are not amortized. Instead, the total amount owed is calculated upfront and divided over a number of equal payments. Paying off the cash advance early does not limit the financing costs you have to pay. You still pay the full finance cost + principal even if you pay early.

When you refinance a cash advance with a new one, you pay the new interest on amount that was used for payoff. The remaining payoff already contains substantial interest, meaning you pay interest on your old interest.

Note: When refinancing an MCA, you always have to pay some interest on the interest of the previous cash advance. The key is to use a product that has market prices. We cover this point in the next section.

b) Extended terms increase total debt size

Extending your loan terms lowers your regular payment. However, it often does this at the expense of increasing your total debt payments (monthly payment x number of payments).

4. The right way to refinance a cash advance

In our experience, the best way to refinance or consolidate merchant cash advances is with a conventional amortizing loan at a reasonable rate. The new facility should be structured to ensure your company can meet its current and anticipated financial needs.

The SBA no longer allows proceeds from its 7(a) loans to be used to refinance cash advances. This can create challenges for some small business owners, especially those with less than $1 million in debt. Some specialty lenders can handle smaller transactions, but they tend to be very selective.

More options are available to companies that need to refinance at least $2 million. Several specialty lenders provide conventional refinancing for transactions of this size.

5. Qualification requirements

Our conventional refinancing program handles transactions ranging from $2 million to $15 million. Larger transactions, up to $50 million, are handled through our middle-market group.

We usually work with companies that meet the following criteria:

1. At least $2,000,000 in debt
2. At least three years in business
3. Equipment and/or real estate
4. Current taxes (or a payment plan in place)
5. Reasonable personal credit
6. A profitable company (or a turnaround plan in place)

Learn more about the qualification requirements for refinancing.

a) The application process

Most deb consolidation loans applications go through the following process:

1. Initial interview
2. Document submission
3. Review of documents and due diligence
4. Final documents
5. Closing date

You can improve you chances of approval and accelerate the process by preparing beforehand.

• Balance sheet (last 2-3 years)
• Income statement (last 2-3 years)
• Corporate debt schedule

Learn more about how to get a debt refinancing business loan.

Need to refinance your merchant cash advances?

For information about our business debt refinancing and consolidation program, fill out this form – a specialized agent will contact you.