MCA consolidation: three different products sold under one word

Four advances, four debits, and four different days of the week where the account gets emptied. Then a broker calls and offers to consolidate everything into one payment.

The offer sounds like the obvious answer. The problem is that "consolidation" in the advance market is not one product. It is a word applied to at least three very different arrangements, and the difference between them is the difference between getting out and getting deeper in.

Three structures, one word

A true refinance

New money pays off the existing balances. The old advances are satisfied, their UCC filings are terminated, and you owe one party under one contract.

This is what most owners picture. It is also the hardest to get, for reasons covered below.

A negotiated consolidated payment plan

No new money. Someone negotiates with each existing funder to modify the terms, and the resulting payments are coordinated so the total leaving your account is affordable and predictable. Sometimes payments are administered through a single account so you make one transfer instead of four.

The balances remain owed to the original funders. Nothing has been refinanced. What changed is the schedule and, in a settlement scenario, the amounts.

A reverse consolidation

A new funder deposits money into your account on a recurring basis to cover your existing debits, and debits a different, usually larger amount over a much longer term. The original advances stay open and unpaid. This adds a new obligation on top of the ones you already have, and it deserves its own analysis before anyone signs one.

Why a true refinance is hard to arrange

The obstacle is lien position, and it is structural rather than a matter of persuasion.

When each funder advanced money, it filed a UCC-1 financing statement against your accounts and receivables under Article 9 of the Uniform Commercial Code as adopted in your state. Priority generally runs by filing date. A new lender writing a check today would sit behind every one of those filings.

No responsible lender takes fifth position on the same collateral. So the refinance only works if every prior filing is either paid off at closing or formally subordinated through an intercreditor agreement. Paying them off requires enough new money to cover the full purchased amounts, not the funded amounts, which is a much larger number than owners expect. Subordination requires funders to voluntarily give up their position, which they rarely do for a business that is struggling.

There is a second obstacle. Most advance agreements contain anti-stacking provisions making it an event of default to accept additional financing secured by the same receivables. Taking a new product without addressing those clauses can trigger acceleration on contracts that were current that morning.

The math test that tells you which one you were offered

Every honest version of this analysis uses the same two numbers, and neither of them is the weekly payment.

Total dollars repaid. Add every payment you will make under the new arrangement, plus every payment you will still make on the old advances if they remain open.

The date of the last payment. Not the term in months as described on the call. The actual calendar date the obligation ends.

Work through a hypothetical. Fairview Print Co. carries four advances with a combined remaining purchased amount of $164,000 and combined weekly debits of $9,200. Two offers arrive.

Offer A is a term loan of $164,000 over 36 months at 22 percent, roughly $6,265 a month, total repaid about $225,500, existing balances paid off at closing, all four UCC filings terminated.

Offer B cuts the weekly payment to $4,100 and describes itself as consolidation. On reading the term sheet, it runs 78 weeks and the existing advances stay open, so Fairview pays $319,800 to the new party while continuing to owe the original funders whatever the deposits do not retire.

Offer B has the smaller weekly payment and costs materially more. That is the entire point of running the test.

What to ask before you sign anything

Ask these in writing and keep the answers.

Will my existing advances be paid off in full at closing, yes or no? If the answer is anything other than a plain yes, this is not a refinance.

Who is paying them off, and when will I receive the payoff letters?

Will a UCC-3 termination be filed for each existing lien, and within how many days?

What is the total amount I will repay, in dollars, and what is the date of the final payment?

Is there a new personal guarantee, and does it cover any balance that remains on the old contracts?

What happens if the funder stops making deposits or advances before my old balances are retired?

Those six questions separate the three products from each other faster than any sales conversation will.

Who is usually on the other end of the call

Most consolidation offers arrive through brokers, and brokers are paid a commission by the funder when a deal closes. That is not automatically a problem. It does explain why the pitch leads with the weekly payment rather than the total, and why the same phone number that sold you the third advance may now be selling you the fix for the first three.

Two things follow from that. First, the person describing the product may not have read the contract you are about to sign, so verify every representation against the term sheet. Second, ask directly how the person is compensated and by whom. An honest broker answers without hesitating.

You can also check the paperwork against public records. UCC filings are searchable through the secretary of state in the state where your business is organized, usually for a few dollars. Pulling your own filing list takes fifteen minutes and tells you exactly who has a claim on your receivables, in what order, and whether the terminations you were promised on an earlier deal were ever actually filed.

Where consolidation fits in the larger picture

Consolidation is a financing decision, and financing decisions only help when the total cost of capital goes down. For a business carrying four advances at effective annualized costs well into the triple digits, that is achievable when the new product is genuinely cheaper and genuinely retires the old debt. It is not achievable by rearranging the same debt into a longer schedule at a higher total.

The states have started forcing this into the open. New York's Commercial Finance Disclosure Law and California's commercial financing disclosure regulations require providers to disclose the finance charge and an annual percentage rate on covered commercial financing before a business signs, and Florida and Utah have enacted their own commercial financing disclosure statutes. If your offer comes from a provider covered by one of those laws, the disclosure sheet answers the total cost question for you. Ask for it.

Where the balances are simply too large for any new financing to solve, the conversation shifts from borrowing to reducing, which is the territory of restructuring and negotiated payoffs rather than consolidation.

One practical step

Before you take another call, list all four contracts on one page with funded amount, purchased amount, remaining balance, debit, frequency and the date the UCC-1 was filed. That page is what a real lender will ask for and what a bad offer hopes you never assemble.