Starting and growing a business can be a tough nut to crack, especially when you’re doing it from scratch with just your savings, a process known as "bootstrapping". To get around this, some business owners resort to loan stacking, a practice where they apply for and get approved for multiple loans in a short span of time. This is possible because the time it takes to approve a loan and deliver the funds is usually shorter than the time it takes to report the loan to credit-reporting agencies.
At first glance, loan stacking might seem like a clever strategy for small businesses. But there’s a catch. Each loan you take on increases your business’s debt burden, which in turn increases the likelihood of default. So, it’s not all it’s cut out to be.
So, what exactly is loan stacking? It’s when you take out more than one loan without your creditors knowing about it. Let’s say you need more capital to pay for office expenses, payroll, rent, new inventory, or an upgrade to your computer equipment. You go to Acme Credit to take out a loan, but they approve you for less than you need. Then, FasterLoans calls and offers to approve you for the rest. If you accept, you’re loan stacking.
While this might solve your immediate cash problem, it could become a headache down the line, especially for the first lender who’s counting on you to pay back their loan.
Is loan stacking legal? Yes, but it’s frowned upon for a number of reasons. For one, it often involves at least one party engaging in fraudulent activity. For instance, some lenders falsely report the number of loans they’re servicing for a specific borrower to a credit bureau. In other cases, lenders use high-pressure or dishonest sales tactics to convince you to take on more debt than you can handle.
Different businesses have different financing needs. For example, starting a food truck can cost between $60,000 and $250,000, while opening a car dealership can require millions. When a company applies for a loan, the lender takes everything into account, including income, accounts receivable, accounts payable, debt, creditworthiness, and collateral. Most lenders won’t lend more than a company can handle based on their financial health. But some lenders, more interested in profit, try to attract current loan holders with offers of additional capital.
Loan stacking makes business owners vulnerable to predatory lenders who target companies with unsecured loans or merchant cash-advance products from other lenders. These lenders capitalize on another lender’s underwriting work by targeting people or businesses that have already gone through the first lender’s approval process. They care little for your financial well-being or about growing a strong business relationship.
Predatory lenders set a very high APR on loan packages, often lend too much money, and do scant or “soft” credit checks. A soft credit check looks at information on a person’s credit report without impacting their credit score. It prevents other lenders from seeing the full details of a borrower’s existing debt load. That’s useful when you’re shopping for a loan. It prevents your credit score from taking a hit just before you try to get credit, potentially increasing your interest rate. But unscrupulous lenders can use it for less-than-noble purposes.
By contrast, honest and responsible lenders prohibit borrowers from stacking loans as part of their contract. They run in-depth credit checks on your company’s finances to ensure you aren’t borrowing more than you can handle. They only lend what fits into your business’s budget, ensuring you can pay back the loan according to its repayment terms.
Reputable banks and most other financial institutions also have systems in place to guard against business loan stacking. But it can take up to 30 days for their hard credit inquiries to show up on a credit report. That means a borrower can take out multiple loans from different lenders during this period without another lender knowing.
Loan stacking can be bad for business for a couple of reasons. First, it can violate the terms of your loan contract. For example, if your loan contract restricts you from applying for another loan until the first one is paid in full, accepting another loan puts you in breach of contract. Second, it can lead to a vicious cycle of debt that can hinder growth and increase the risk of default.
If you need more funds, there are safer alternatives to loan stacking. You could ask your lender for more money, especially if you’ve been making timely payments. You could also consider refinancing your loan, which involves taking out a new loan with better rates and fees to pay off your existing high-interest loan. Another option is to apply for a line of credit, which gives you access to funds on demand, often with higher limits than business credit cards.
In conclusion, while loan stacking can be tempting, it’s usually too good to be true. High interest rates and mounting debt can be hard to manage for most small businesses. In most cases, loan stacking puts your business in serious financial jeopardy. Even though some lenders promote loan stacking for debt consolidation, most legitimate lenders believe it puts small businesses at risk of default and undermines the entire industry. So, before you consider loan stacking, remember that at some point, you must pay back the principal. That’s when your hard work and dreams for success can hit a dead end.
