Should You Refinance Your Merchant Cash Advance? How?

Companies that struggle with their merchant cash advance (MCA) debt often consider using debt refinancing. 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. Why cash advances are often a bad idea
  2. Whether you should refinance your cash advance
  3. Why you should never use a cash advance to refinance debt
  4. The proper way to refinance merchant cash advances

1. The problem with cash advances

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

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

This situation can repeat itself, as the company gets a third or fourth cash advance. Stacking MCAs is very dangerous and can lead to a financial tailspin. Unfortunately, we see this situation often.

2. Should you refinance your cash advance?

The short answer is “it depends.” You should refinance your cash advances only if all of the following are true:

  1. Your cash advances are causing (or will cause) financial trouble
  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 you cannot meet these three criteria, consider alternatives. Otherwise, refinancing may actually leave you worse off. Learn more about the advantages / disadvantages of consolidating debt.

If your company has financial problems, we encourage you to work with your CPA (or similar professional). Working with a CPA may not be cheap, but it is cheaper than making the wrong financial move.

3. Don’t refinance cash advances with another MCA

Companies with unmanageable debt sometimes try to consolidate multiple cash advances using 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 is still very expensive and is usually a bad deal. Here is why:

a) You pay the expensive interest 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 amount of interest you have to pay. You still pay the whole amount of interest + 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

The right way to refinance a cash advance is to use a conventional loan. The loan needs to have a competitive market price and must use amortization. Realistically, only two products meet these criteria.

One option is an SBA-backed loan to consolidate your cash advances. Getting an SBA-backed loan is not as difficult as most people think. However, you need to get your accounting in order.

If you don’t qualify for an SBA-backed loan, the alternative is a conventional commercial loan. Banks and other lending institutions offer these loans. They can be more expensive than SBA-backed loans, but they are still more affordable than a cash advance.

a) Will you qualify for a loan?

To qualify for our refinancing program, the owner and the company have to meet some basic criteria. They must have:

  1. A minimum debt of $500,000
  2. At least 3 years in business
  3. Equipment and/or real estate
  4. Up-to-date taxes (or a payment plan in place)
  5. Reasonable personal credit
  6. A profitable company (or one that would be profitable with better debt)

Learn more about the qualification requirements for refinancing.

b) How to get the debt consolidation loan

Unlike cash advances, getting a loan requires that you provide detailed information about yourself and your business. Loans also take some time to underwrite – plan for this.

Loans are cheaper because they are based on your:

  • Collateral
  • Track record
  • Future opportunities

It takes time and resources to evaluate these company specifics. However, if you are well prepared, the process can be relatively painless. The loan acquisition process has 5 stages:

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

If you want to shorten the time it takes to get the loan, we suggest that you get the following documents ready:

  • 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.