October 2, 2019

Loan Stacking Is Bad For Your Business

Since the 2008 recession, banks and traditional lenders have been wary to lend out as much money as they used to, so in response small business owners are turning to alternative funding options to start and grown their businesses.

What is Loan Stacking?

The term “Loan Stacking” is when a borrower takes out multiple loans from different lenders at the same time. The term is commonly used when borrowers apply for and receive approval on several short-term business loans and financing in short succession, with each one having similar interest rate and repayments terms.

Having concurrent loans and funding can negatively affect a borrower's ability to afford the loan payments. If the borrower defaults, the presence of multiple lenders can make it hard for each creditor to recover their money.

What are the risks?

Loan stacking puts a lot of adverse pressure on your cash flow. With the presence of more than one creditor at your front door, there is a higher probability that you will default on at least one loan, and this would seriously damage your credit rating for the future. In many cases lenders include anti-stacking polices in their loan agreements to ensure themselves against going after your assets and resources; and they need to be certain that they'll have the option to recover their money.

Loan stacking can put you and your business into a negative cycle of debt. In the case you can't handle the debt, it could lead to a default—which means your business or personal assets could be liquidated, you could be required to repay the full amount immediately.

What are your options?

If you find yourself in need of more financing after your initial loan, there are a few alternatives, Loan stacking is never your only option.

The first option when facing a shortage of capital would be to go back and contact the lender that issued you your current loan. Many lenders have policies that allow borrowers receive additional funding once they’ve paid off at least 50% of their loan or have made timely payments over several months.

Refinancing your business loan with another creditor is another good option. This is not the same as loan stacking, instead of having two separate loans, the new lender will pay off the old lender, leaving you with just one loan and a lower interest rate.