What a reverse consolidation actually does, mechanically

A reverse consolidation adds a funder. It does not remove any. That single fact explains most of what people find confusing about the product after they sign.

The mechanics

You have several advances debiting your bank account, usually daily. A reverse consolidation funder agrees to deposit an amount into your account on a regular cycle, commonly weekly, sized to cover those daily debits. Separately, it debits your account for its own payment.

That is the whole structure:

1. Money comes in from the new funder each week.
2. Your existing daily debits go out as before, funded by that deposit.
3. The new funder's own debit goes out on its own schedule.
4. Your existing advances run down on their original terms and eventually finish.
5. The new funder's balance continues after they do.

What does not happen

What is added

A new agreement, with its own cap or fee, its own weekly debit, its own default provisions, its own UCC filing and its own guarantee. In lien terms, the new funder is behind everyone already filed. That is one reason the pricing is what it is.

Read the new agreement for these in particular:

• What happens if a deposit does not arrive. If the funder stops depositing for any reason, your daily debits continue and you are covering them alone, immediately.
• The obligation to maintain the account. Many agreements require you to keep a specific bank account open, to grant read access to your banking data, and to route deposits through it.
• Restrictions on new funding. Taking anything else is normally an event of default, so this becomes the last position you can add.
• Cross-default language. Whether a default with an existing funder is also a default with the new one.
• What ends the deposits. Typically any breach, any returned debit, or a change in your bank arrangements.

Why it is presented as consolidation

Because your experience of the payments changes. Instead of watching several daily debits, you watch one weekly debit and a weekly deposit. Cash flow smooths out. Bookkeeping simplifies. The relief is real and it is the reason the product sells.

What has not changed is the total owed to the original funders, the number of contracts you are subject to, or the number of parties with a claim on your receivables — which has gone up by one.

The failure mode to understand before signing

If you cannot make the new funder's debit, the deposits stop first. Within a week you are covering the full original daily debit load out of the business again, with less cash than you had before, and with an additional funder who is now also in default and holds a guarantee against you.

The structure is stable while the new payment is affordable and the existing advances are running down as expected. It comes apart quickly if either of those changes, and it comes apart faster than the position you started from, because the new payment sits on top of the old ones the moment the deposits cease.

The arithmetic, done once

A reverse consolidation deposits $9,000 a week for those sixteen weeks — $144,000 in total — and debits $3,500 a week for fifty-two weeks, which is $182,000.

• Cost of the arrangement: $182,000 less $144,000, or $38,000.
• Cash freed while the old advances still run: $9,000 in against $3,500 out, so $5,500 a week for sixteen weeks — $88,000 of breathing room.
• What happens in week seventeen: the deposits stop, the old debits have ended, and $3,500 a week continues for thirty-six more weeks. That is $126,000 still to pay, on a product that put no working capital into the business.
• Discounting the whole stream, the annualised cost of the arrangement comes out near 74%.

Those figures are arbitrary and yours will differ. The shape will not: a large amount of temporary relief, a real price for it, and a long tail of payments that outlives the problem it was bought to solve.

The variable that breaks the model

All of that assumes the existing advances run down as expected. Two things routinely stop that happening.

The question to answer first

The relevant question is not whether the weekly number is lower than the daily numbers. It obviously is; that is the design. The question is what the arrangement costs in total, against how much cash it frees during the period when you need it — and whether you can carry the new payment after the existing advances have finished and the deposits have stopped. That is a calculation, and it is worth doing before rather than after.