Stacking, consolidation and reverse consolidation

Each open advance on a merchant's account is a position, numbered in the order taken. A merchant with one advance is in first position; take another and the new funder is in second. Stacking is carrying more than one at once.

Stacking is common and not automatically a problem. A merchant with strong revenue and a small first position may carry a second comfortably. The danger is momentum: each new advance adds a debit, the account gets tighter, and the next shortfall is covered with another advance at a higher factor. Many first-position contracts restrict additional financing, and stacking against those terms can be treated as a default.

A catering company has $90,000 a month in true revenue and two daily positions. A third funder is offering a weekly advance with a $2,100 payment. What share of revenue goes to advances?

current burden  = ($9,450 + $6,825) / $90,000          = 18.1%
with 3rd        = ($9,450 + $6,825 + $9,100) / $90,000 = 28.2%

At 18% the merchant is already near the top of what many funders allow. At 28%, more than a quarter of every dollar that comes in leaves again before rent, payroll or inventory. That is the deal most likely to end in returned debits and a default within weeks, which also means a clawback for the broker. Try it with the stacking calculator.

Funders want to know every open position, its payment and its estimated balance, plus anything paid off recently. They check the bank statements for recurring debits, search UCC-1 filings, and ask the merchant. They care because their payment comes after everyone else's: a new position is the junior claim on the same deposits. A merchant who took two advances in the last 30 days is also a pattern funders read as distress.

A merchant who leaves a position off the application will be found out on the statements or the funding call, and the deal dies there. Disclosed positions get priced; hidden ones get declined.

A consolidation is a new, larger advance that pays off existing positions at funding. Say the two positions above have $18,000 and $14,000 left to pay. A funder offers $50,000 at 1.32 with a 3% fee over about nine months of daily payments.

payoffs          = $18,000 + $14,000                = $32,000
net cash         = $50,000 - $1,500 fee - $32,000   = $16,500
payback          = $50,000 x 1.32                   = $66,000
daily payment    = $66,000 / 189                    = $349.21
new burden       = ($349.21 x 21) / $90,000         = 8.1%

Burden falls from 18.1% to 8.1% and the merchant gets $16,500 of cash. The trade-off: they now owe $66,000 for that cash plus balances that were only $32,000, and the term is longer. Ask the existing funders for payoff letters, since some give an early-payoff discount.

A reverse consolidation does not pay anyone off. The new funder deposits money into the merchant's account each week, sized to cover most of the existing daily debits, while those positions run down. The merchant pays the new funder one smaller payment over a longer term. In the example above, the existing debits total $775 a day, about $3,875 a week; a reverse consolidation funder might deposit a large share of that weekly and take back a lower weekly payment stretched over many more months.

It is aimed at over-stacked merchants and it relieves cash flow quickly, but the total cost rises, the original positions are still owed, and the arrangement draws regulatory attention. Some original funders' contracts may view it unfavorably. Treat it as a distressed-merchant product, document why it was the right fit, and route it through whoever owns compliance in your shop.

Existing positions are recorded on the merchant with the lender, payment, frequency and estimated balance. The bank statement analysis on the deal turns them into current holdback and, with a proposed payment from the offer calculator, a combined holdback graded against the green, amber and red bands your shop sets. Deals can be typed as consolidation or reverse consolidation, offers take payoffs so net funding is right, and lender matching checks each lender's maximum positions. Automatic detection of positions from statement transactions is coming soon.