Business loan stacking is a term used when a business takes out several loans and they ‘stack’ one over the other. And there is never a good time to use this option. In fact, you should actively avoid it, warns the Forbes. If your situation is dire, there are safer alternatives to try. Stacking should be the very last option and you have to understand all the risks before you resort to it.
Risks of Business Loan Stacking
All the risks associated with taking loans apply to business loan stacking by default. However, they double (triple, etc. depending on how many debts you have), which makes your situation much worse.
There are also some risks inherent to this specific situation:
- Taking out a new loan might be violating the terms of the previous one. This might lead to severe penalties, big fines, and even legal problems for the business.
- By taking out several loans at the same time, you put an immense pressure on the business’ cash flow due to mandatory regular payments. This means that should any accident happen, you won’t have the cash to deal with it immediately and might be forced to take out another loan thus making the situation worse.
Do not forget another important thing. Loans are never fair, so you have to accept that you’ll be returning a significantly bigger sum of money than you borrow. With several loans, that number can turn catastrophic. This is sure to be the case because you won’t be able to get a few loans with low interest rates, so at least one of them is bound to have extremely unfavorable terms.
Safer Alternatives to Business Loan Stacking
1. Taking a Single Loan of a Sufficient Size
Many business owners turn to stacking because their bank doesn’t provide them with a loan big enough to satisfy their needs. This usually happens with good reason as the lender understands that the company cannot handle the strain of such debt. However, if you are positive that you need that exact sum of money, you should first look for a different lender. Loanable loans for example, are extremely versatile because the company can match you with multiple financiers, including those willing to take a risk with small business and low credit score. Therefore, you should always start with researching other sources of financing.
However, before you do this, you should use some type of business loan calculator. This should give you some idea of what you can realistically expect. You might need to reconsider the amount you plan to borrow to prevent serious financial problems.
2. Get More Money from Your Current Lender
If you already have a loan, but still need the money, try to renegotiate your current agreement. To do this, you’ll need to provide an amended business plan and reliable proof that your company truly needs that amount to achieve better results.
Compiling that packet of documents alone is a very educational experience. As you will need to assess the situation from different angles and provide some proof, you might reevaluate your goals. Perhaps, that additional loan should really be smaller.
Unfortunately, getting more funding from the same lender is a big challenge. This might be nearly impossible if you have a history of late payments or have yet to repay over a half of your original debt.
3. Refinance with a Different Lender
Refinancing is one of the best alternatives to business loan stacking because it can help you get a better deal than you had in the first place. In fact, you might consider refinancing even if you don’t need more funding. This procedure might provide you with better interest rates or less strict payment terms, which are often unavailable to startups.
If you were diligent in your loan payments and your business shows a steady positive growth, you shouldn’t have any trouble refinancing. Getting some additional funding from the new lender might be harder. However, with a good business plan and past successes, you’ll get that too.
Note that you might be able to consolidate your debt and refinance it under a single loan if you currently are in a loan stacking situation. Consult a finance expert to help you with this option.
If Alternatives Aren’t Possible: How to Make Business Loan Stacking Safer
If you have no choice but to take out several loans, you need to choose the types that won’t be very similar. For example, you have a big business loan dating back to the launch of your startup and a payment on it is due a week before you get a payment from a customer. In this case, you can take a short-term loan to make that payment on time and close it immediately after you get the money.
Business loan stacking is never good, but sometimes it’s necessary. When this happens, you should look for the option with the lowest level of risk.