On Loan Consolidation

By: Micah

Consolidations replace existing debt or advances with new, smarter debt in order to manage your payments to high-interest lenders, either through paying off your funders that you’re paying daily for monthly payments or a Line of Credit with collateral, or lowering your daily payments and freeing up cash-flow.

While a merchant cash advance is a an easy way to get capital without collateral—many (most) merchants become over-leveraged. Using collateral as a way to change your payment schedule is the best way to rearrange your needs. Real estate, Accounts Receivables, Machinery and Equipment are some of the top options available. There are also many other creative ways to deploy loans to lighten the burden of daily payments.

The question is always, “What type of consolidation?” Do you really want to add debt onto debt, when the last set of debt may itself be effectively an expensive term loan? If it’s revolving option, like a Line of Credit, then we understand – you can end the cycle by preventing adding too much debt and only take what you need in the future.

However, unless the lower interest rate not only increases cash-flow, but increases cash-flow significantly, it’s unlikely going to help for very long.

Before becoming a loan consultant, I thought “consolidation is always good” – Credit cards have no prepayment penalty, so consolidation comes with “lower interest rates” and they actually save money. However, that’s not always the case. If the consolidation has a lower payment plan, it might very well cost more than the original loan.

In the case that adding large debt makes sense, the consolidation is worthwhile with a solid plan for the future, a large return on the investment or defaulting on other loans and losing your business otherwise.

Recently, we had a case of an over-leveraged merchant grossing around $18.000 monthly, who since his business credit was established, we arranged a consolidation through a unique funding program offering him a 5-year term, paid monthly, changing three positions that he’s paying $441 daily ($9500 monthly) into a manageable $640/month term, and he didn’t even need to pay off the first advances. The money over time is more expensive if kept the entire time, but it freed up significant working capital.

A nice success story of adding debt onto debt just happened. Wonderful business in Georgia. He had a good rate on a cash advance from National Funding. A broker called him and gave him a 2nd position from QuarterSpot (paying weekly) . Then he said, “Let’s consolidate the National position and get you more money!” That means, he netted about 50%, and not only paid back the entire National position from the “new” second position, but added debt onto debt. Then he was struggling, so the broker got him a third position! He was now paying the equivalent of $2033 daily!

Of course, this broker wanted nothing more than to do what I then did….

The client found me online. He called me. I went over his credit report, and saw he is close to $100,000 in personal credit card debt. He had been sick for the last 2 years, and had no financials. The only way to save his business from closing was to keep him open through reduces his daily payments by a whopping 35% to $1626 daily. He was also able to keep his Kabbage line of credit active and not default, and keep his business credit in tact.

His term extended from about 6 months to about 12, but it’s a much softer landing.

There are times to justify adding debt onto debt. But it needs to make sense. Had the client come to be first, I would have arranged a #lineofcredit for him, and he never would have had to take a large cash advance in the first place. But once he’s there, we have to find the right out.

Let me know if I can help you or your clients in any way. Contact us directly!

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