It’s been a couple months since you received a small business loan. You’ve been working hard to use the money to grow your business and make payments on time, but cash flow is feeling tight and you could use some additional funding to get over the next hurdles for your business. What should you do?
Many business owners may start asking questions like “can you get multiple loans at once?” While taking additional loans at the same time—a practice called “loan stacking”—may feel like the easiest way forward at the moment, it may actually expose you to a lot of financial risk. In this article, we will discuss what loan stacking is, why it’s risky, and what you can do instead.
What is loan stacking?
Let’s start with the question, what is loan stacking? The general loan stacking definition is when you take on multiple business loans (or other financing like lines of credit, merchant cash advances etc.) from multiple lenders at the same time.
Oftentimes the borrower will not disclose the existing financing to the other lenders either because they do not know it’s necessary to share that information or because they fear it can impact their financing request.
Without the proper information to assess a file, lenders won’t be able to help small business owners make realistic decisions on what kind of financing they can afford.
The risks of loan stacking: For lenders and borrowers
From a lender’s perspective, when a borrower’s risk of defaulting on a loan increases, so does the lender’s risk for financial loss. As a result, many lenders put terms against this in their loan agreements to discourage borrowers from stacking loans. From a borrower’s perspective, this means stacking business loans may breach your existing loan contract and you may incur a penalty fee or other serious consequences.
Another risk for borrowers, the increased likelihood of being unable to repay the loans. Each loan comes with its own interest rate or factor rate, payment schedule and associated costs. Not only does this mean you have to keep track of multiple loans to pay, but the added financial obligations can also add up over time, putting stress on your cash flow.
When it gets to that situation, many businesses will end up defaulting on a loan payment, which will damage both business and personal credit scores. This can be exacerbated if the lenders you are working with make hard credit pulls. Multiple credit inquiries in a short period of time may also negatively impact your credit and raise red flags for future lenders.
Business loan default records can end up on your business’s public record, which, in addition to your credit score, can harm your chances of getting business loans in the future.
Now that you’re aware of the risks, let’s take a look at how a business owner may fall into the trap of loan stacking in the first place.
The differences between borrower-initiated and lender-initiated loan stacking
Borrower-initiated loan stacking is just what it sounds like—a business owner intentionally takes on additional financing without informing their existing or new lender. At the time, it may seem like they’ll be able to make all the payments on time, but cash flow can fluctuate, sometimes without notice, and it only takes one small setback for the payments to start piling on top of each other.
However, most borrowers don’t end up stacking loans deliberately. Some unscrupulous lenders look for businesses in a financial pinch and encourage them to take additional financing without disclosing it to their original lender—you can think of this as lender-initiated loan stacking.
While these bad actors may offer lower interest rates or discounts that make the offer sound enticing, longer terms or hidden fees can make it more expensive. These companies often don’t have your business’s best interest in mind. If you’re approached by a different lender directing you to additional financing, make sure to do your homework. Consult your existing financing provider to understand your options and potential risks.
What you should do instead of stacking loans
Is loan stacking a crime? Not necessarily, but it is associated with fraudulent behavior, and can very easily lead you into risk. To avoid putting yourself in this situation, be transparent with your original lender.
When a lender reviews the financing application and credit report of a small business, they’re trying to assess the business owner’s ability to repay the loan while maintaining a financially healthy business. If a business owner conceals information about other financing they’ve taken on, the lender does not have the necessary information to help the borrower make the best choice.
Can you take out multiple loans without it being considered stacking? The short answer is yes. It all depends on how you go about it. For example, some financing products are more complementary to each other than others and can help you get additional financing without putting you at excessive risk. Work with your lender to understand what works best for your unique circ*mstances.
A lot of lenders will also allow you to renew your financing once you’ve paid off more than 50% of your existing loan. This is a great way to get additional financing safely.
If you’re not in immediate need of financing right now, focus on improving your business’s health so if you do need financing in the future you can be eligible for better terms. Check your business credit score and if there’s room for improvement, create a plan on how you’ll increase your score. You can also keep track of your gross revenue vs net revenue to understand fluctuations in your cash flow and where you make optimizations. And if you found your original lender to be a good partner, consider reaching out to them periodically to keep them abreast of your financial situation and needs so that you know what you need to do to prepare for potential urgent cash flow needs.
Financing providers, like Credibly, are usually more than happy to help you find alternatives as they are also motivated to help you succeed—without landing you in hot water. They can help you answer questions like “how many business loans can you have at once?”, alternative options to getting additional financing, and best practices for managing your loans.
