How To Refinance Your MCA Debt: A Step-By-Step Guide

Merchant Cash Advances (MCAs) can be a double-edged sword. They offer quick access to funds but often come with high costs and frequent payments that can strain your business’s cash flow. Refinancing your MCA can be a strategic move to regain financial stability and lower your monthly obligations. We specialize in helping businesses like yours find practical solutions to manage MCA debt effectively. Here’s our step-by-step guide on how to refinance MCA debt.

Understanding Merchant Cash Advances

Before looking into the refinancing process, it’s important to understand how an MCA works. Unlike traditional loans, MCAs provide a lump sum of cash in exchange for a percentage of future sales. This means your daily or weekly payments fluctuate with your sales volume.

While this flexibility might initially seem advantageous, the high factor rates (typically 1.2 to 1.5) can lead to significant costs.

How To Refinance MCA

Determine Your Payoff Amount

The first step in refinancing your MCA is determining the exact amount you need to pay off. This figure includes the remaining balance of your MCA and any associated fees. Contact your MCA provider or review your loan agreement to get this information.

For example, if you took an MCA of $100,000 with a factor rate of 1.5, you would need to pay $150,000. Subtract any payments you’ve already made to find your payoff amount.

Consider Your Refinancing Options

Refinancing an MCA involves replacing it with a new loan with more favorable terms. Here are some standard loan options to consider:

• Term Loans

A term loan provides a lump sum of money you repay over a fixed period, usually with a lower interest rate than an MCA. This option is ideal if you need a predictable repayment schedule and longer terms to ease your monthly payments.

• Small Business Line of Credit

A small business line of credit offers flexibility by allowing you to draw funds up to a predetermined limit as needed. You only pay interest on the amount you borrow. This can be useful for managing cash flow fluctuations without the high costs associated with MCAs.

• Personal Loans for Business Purposes

If your business credit is not strong, consider a personal loan for business purposes. These loans are based on your credit score and can provide a lump sum to refinance your MCA.

• Home Equity Loan (HELOAN) or Home Equity Line of Credit (HELOC)

If you have significant equity in your home, a HELOAN or HELOC can offer lower interest rates. These loans use your home as collateral and provide a way to refinance your MCA with more manageable terms.

Check Your Eligibility

Before applying for a new loan, check your eligibility. Different loans have varying requirements, such as credit score, revenue, and business time. Here’s a quick overview of typical qualifications for the refinancing options mentioned:

• Term Loans: Credit score of 620+, annual revenue of $100,000+, and 6 months to 2 years in business.
• Small Business Line of Credit: Credit score of 640+, yearly revenue of $100,000+, and 6 months to 2 years in business.
• Personal Loans: Credit score of 660+ and a debt-to-income ratio of 40% to 50%.
• HELOAN/HELOC: At least 10% home equity, a credit score of 660+, and a debt-to-income ratio of 45% to 50%.

Choose a Lender and Apply

Consider factors like interest rates, repayment terms, and fees. Working with a loan broker like Lendio can simplify this process by matching you with a funding specialist who can find the best loan options for your needs. Lendio has a network of over 75 lenders, providing a variety of choices.

Once you’ve chosen a lender, gather the necessary documentation and submit your loan application. This typically includes financial statements, tax returns, and details about your MCA.

Review and Accept Loan Terms

After submitting your application, the lender will review it and offer a loan. Carefully review the terms, including the interest rate, fees, repayment schedule, and any restrictions on using funds. If the terms are acceptable, sign the loan agreement to move forward.

Pay Off Your MCA

Once your new loan is approved and funded, use the proceeds to pay off your MCA. Depending on your agreement with the new lender, funds may be disbursed directly to your MCA provider or bank account. This will enable you to make the final payment yourself.

Benefits of Refinancing Your MCA

One of the primary advantages is the potential for lower monthly payments. By refinancing to a loan with a longer repayment term, you can spread out your payments over an extended period, reducing the amount you need to pay each month.

Additionally, many traditional loans come with fixed payment schedules, unlike the variable terms of MCAs. This fixed structure can provide greater predictability for your cash flow, allowing you to manage your finances more effectively. Furthermore, loans often require payments on a monthly or weekly basis, rather than the daily payments typically demanded by MCAs.

Another benefit is the possibility of reducing your overall interest costs. With refinancing, you might secure a new loan with a lower interest rate, which can decrease the total cost of borrowing. This can result in substantial savings over the life of the loan, further easing your financial obligations.

When to Refinance Your MCA

Refinancing your MCA is a good idea if you face cash flow issues and need more manageable payment terms. Consider refinancing if you want to:

• Have predictable payment amounts
• Reduce your monthly payments
• Decrease the frequency of payments
• Improve your overall cash flow

Merchant Cash Advance Alternatives

Before choosing a MCA, consider alternative financing options that may be more cost-effective. Business credit cards offer flexible short-term financing, providing quick access to funds without long-term commitments. Invoice factoring allows you to sell your accounts receivable to improve cash flow without incurring additional debt.

For more favorable terms and lower interest rates, explore Small Business Administration (SBA) loans, though they do require more documentation and a longer approval process. Each of these options can provide a more manageable financial solution compared to an MCA.

FAQs

Can I save money by refinancing an MCA?

While you can’t save on the upfront fees of an MCA, refinancing can lower your monthly payments and provide more favorable terms.

Is it challenging to refinance an MCA?

Refinancing can be complex, but working with experienced professionals can simplify the process. Brokers like Lendio can help you find suitable lenders.

What are the benefits of refinancing an MCA?

Refinancing can improve your cash flow, provide fixed payment amounts, and reduce the frequency and amount of your payments.

Refinancing your MCA debt can be a strategic move to improve your business’s financial health. By understanding your payoff amount, exploring available loan options, and carefully selecting a lender, you can secure more favorable terms and reduce the burden of high-cost debt.

At Value Capital Funding, we’re here to guide you through the process and help you find the best MCA debt relief solutions for your business.

Take control of your financial future today. Contact us to discover your refinancing options and start your journey toward financial stability.