Reverse consolidation: what it fixes and what it does not

Reverse consolidation is marketed to businesses carrying multiple advances as a way to consolidate. It is worth being precise about what it does, because in the standard structure it does not consolidate anything.

The mechanics

1. A new funder agrees to deposit a fixed sum into your operating account on a recurring basis, usually weekly, sized to cover the daily remittances your existing positions will take that week.
2. The new funder debits you a larger amount over a longer period, under its own agreement with its own purchased amount, guarantee, UCC filing and default clauses.
3. Your existing advances continue exactly as before. They are not paid off, not renegotiated, not terminated. Their daily debits keep running, funded partly by the money being deposited.

Net effect on any given week: your cash position improves, because money is coming in to meet the debits. Net effect on your total obligation: it increases, because you now owe everything you owed before plus the cost of the new facility.

Illustrative only — suppose two positions are taking $1,080 a day, roughly $5,400 a week. A reverse consolidation deposits $5,400 weekly and debits, say, $1,900 a day over a longer horizon. The immediate pressure falls. The total to be delivered rises, and the new obligation outlives the old ones.

What it genuinely fixes

What it does not fix

Illustrative only — the whole transaction, both sides

The marketing describes the relief. The contract describes the total. Put both on one page.

A reverse consolidation deposits $5,400 a week for sixteen weeks, which is $86,400 arriving in your account, and debits $780 a day against a purchased amount of $128,700 over 165 banking days. The factor on the money advanced is about 1.49.

What changes immediately: your net daily outflow falls from $1,080 to $780, which is $1,500 a week of relief.

What changes in total: you still deliver the $79,800 you already owed, and you now deliver $128,700 as well, against $86,400 received. Net cash out across the whole arrangement is $122,100 rather than $79,800 — $42,300 more.

What changes at the end: your last obligation moves from about fifteen weeks away to thirty-three weeks away.

That is the product stated honestly: fifteen hundred a week now, forty-two thousand later, eighteen extra weeks. Whether it is a good trade depends entirely on what the fifteen hundred a week is used for.

Reverse consolidation versus an actual buyout

A true buyout or refinance pays the existing positions off and closes them. You end with one obligation. Reverse consolidation, in its usual form, leaves you with all the old obligations plus a new one.

Both are sold with the word "consolidation". The distinction is entirely in what happens to the old deals, so ask it as a factual question:

• Are my existing positions being paid off in full at closing, yes or no?
• If yes, will I receive a payoff letter or letter of satisfaction from each existing funder?
• Will each existing funder file a UCC-3 termination, and will I get copies?
• If no, what happens to my existing obligations, and have my existing funders consented in writing?

A funder offering a genuine buyout answers those in one email. A funder offering a reverse consolidation will answer differently, and that is fine as long as you know which product you are buying.

Before signing one

• Get every existing position's exact remaining balance and daily amount in writing, from the funders, not the broker.
• Add up the total you will deliver under all agreements, old and new combined, and compare it to the total you would deliver if you did nothing.
• Work out the date the new obligation ends. It is usually well beyond the old ones.
• Read the new agreement's default list, guarantee and confession of judgment provisions with the same care as the first one. Distress is not a reason to skim.
• Ask what happens to the weekly deposits if you miss a debit. In some structures the deposits stop while the debits continue, which is the worst position of all.
• Take advice. If you are considering this, you are at the point where an hour with a restructuring lawyer is cheaper than any of the alternatives.

The honest summary

Reverse consolidation is a timing product sold as a debt-reduction product. If your problem is genuinely timing and the business is otherwise sound, it can work. If your problem is that you owe more than the business can produce, it adds to what you owe in exchange for postponing when you find out.

The question nobody asks until it is too late

What happens to the weekly deposits when the old positions finish?

In the structure above the old debits stop at week fifteen and the new debit runs to week thirty-three. If the deposits also stop at week sixteen, the last seventeen weeks are $780 a day of pure outflow with nothing coming back. That is the stretch nobody plans for, because by then the crisis is months past and the relief has been spent.

Write the week-by-week out before signing: money in from the new funder, money out to everyone, and the net. The worst rows are almost never the first ones.

Then ask the specific questions that the week-by-week raises:

1. On what date does the last deposit arrive, and is that date in the contract or at the funder's discretion?
2. If I miss one debit, do the deposits continue? Get this in writing. In some structures the deposits stop while the debits do not, which is the worst position available.
3. Is the deposit amount fixed, or does it adjust if one of the old positions is renewed, accelerated or settled?
4. What happens if an existing funder accelerates on the anti-stacking clause the day this funds?