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It can be difficult for a small business or a start-up to secure external funding. In fact, most small business owners have no choice but to finance their enterprises through personal earnings and savings. So, it can be tempting to jump on any financing opportunity that comes along, even if it means making some shady moves. Loan stacking is one such questionable play on business financing.
Loan stacking is a tactic for getting multiple loan approvals from different lenders at the same time. In theory, loan stacking sounds like a great way to access the much-needed cash influx to grow a business. But is it? Let’s find out.
What is loan stacking?
Loan stacking simply means taking multiple loans without the lenders knowing about it. To pull it off, the borrower must apply and get approved for the loans within a very short time, ideally in a matter of hours or a few days. That way, none of the lenders will have had time to report any of the loans to credit bureaus.
Due to the narrow time window, loan stacking only works for fast-approval products such as unsecured microloans and merchant cash advances.
Lenders are very cautious about loaning to businesses with outstanding debts. Many lenders will actually turn away borrowers with a debt-to-income ratio exceeding 50%. Understandably, too much debt is a huge red flag when it comes to business financing. Loan stacking gets around this “problem” by taking advantage of the delay loophole in reporting debtors and the availability of multiple concurrent loan offers.
Is loan stacking illegal?
The short answer is "no," loan stacking is not illegal, but it is frowned upon as mischief. However, loan stacking can violate multiple loan agreements and raise suspicion of fraud. Stacking loans means you’re misrepresenting your business and lying about the loans being serviced. So, you may not get in trouble with the law, but you won’t be on the lender’s good side if they catch on to you.
Most lenders discourage and even actively prevent loan stacking due to the likelihood of financial fraud. For instance, a fraudster or a company that's going out of business can unscrupulously stack loans with no intention of paying them back. Fraud aside, "loan stackers" are also more likely to default payments given the heavy debt load.
Taking multiple loans is not a problem as long as you follow the due process and do everything by the book. But stacking is sort of a legal gray area in business financing.
The risks and dangers of loan stacking
The main reason for loan stacking is pretty straightforward. Borrowers resort to loan stacking when they can’t raise all the money they need from one lender. Although it works, it's quite frankly a messy and risky way of sourcing funds. Here’s how loan stacking can potentially harm your business:
High financing costs
The costs of paying off multiple loans can really add up. Remember that each loan comes with its own interest and fees, depending on the amount and lender. And in most cases, stacking involves quick unsecured loans with exorbitant rates and charges. You may get the money you need, but at a cost that barely justifies the purpose.
Excessive pressure on cash flow
Servicing more than one debt can severely stress an SMB's cash flow. Each loan will probably have a unique repayment structure. As a whole, the combined debts will weigh heavily on the cash pipeline, to the point where the business is constantly starved of cash.
High risk of default
The more loans you have, the harder it’ll be to service them with a limited cash flow. You can only draw so much money from the business before repayments become unsustainable or downright impossible. If that happens, you might end up defaulting some or all the loans, effectively ruining your chances of future financing and risking further action against the business.
Falling into a debt trap
A habit of taking multiple loans can quickly lead to a vicious debt cycle. You'll start taking new loans to cover previous debts and so on until the business can no longer survive without debt. Such debt cycles usually start off small and quickly snowball out of control. And as the debt trap tightens, it becomes harder and harder to break free.
Implications of violating loan contracts
If one of the lenders realizes that you are stacking loans, they may hold the business or yourself in violation of their financing agreement. Once a violation is established, the lender reserves the right to take action against the breach of contract. They may demand immediate full repayment of their loan or even file a lawsuit depending on the severity and repercussions of the violation.
Alternatives to loan stacking
Loan stacking is way too risky and rather unprofessional on the borrower’s part. Luckily, you don’t have to take that route — here’s what you can do if a single loan just won’t cut it:
Negotiate with lenders for higher loan limits
Your borrowing limit depends on various risk factors, such as business credit, collateral, cash flow, and operating history. But loan limits are not set in stone. You can always negotiate with the lender to increase the amount on offer. Convince the lender to extend more credit by clearly stating why you need the money and presenting a foolproof repayment plan. They might just hear you out.
Try alternative funding sources
A diverse credit mix is more sustainable than stacked loans. Instead of taking on more loans, try alternative financing options such as lines of credit, crowdfunding, invoice factoring, asset financing, and equity funding. Some of these do not involve debt at all. If multiple lenders are willing to offer you loans, then your business is probably eligible for other less risky and perhaps more suitable financing solutions.
Refinance or consolidate your debt
Stacking might seem like the only way to secure a sizable loan, especially if you are already servicing a couple of debts. But instead of stacking loans, you can always refinance or consolidate your outstanding debts to improve your financial bargaining power.
Debt refinancing refers to taking a single loan to cover all outstanding debts. Consolidation, on the other hand, combines all your debts into one big debt. In both cases, the new debt is easier to manage and repay. More importantly, it can lower your debt utilization ratio and boost your credit score, putting you in a much better borrowing position.
To stack or not to stack?
Loan stacking is an alluring temptation, especially for cash-strapped businesses. And it makes a lot of sense at first. But loan stacking is probably not the best answer to your financial problems. It’s just too risky in so many ways, from straining the cash flow and struggling to repay to weakening your borrowing power. Not to mention the possibility of legal action if caught in the wrong.
All things considered, loan stacking is simply not worth it. Besides, there are so many other ways to fund a business without risking as much. And Lendzero can help you find them. Lendzero is an online borrowing assistant that matches borrowers with curated business financing offers. It automatically prequalifies your business for dozens of legit, pre-negotiated financing deals. With such a tool, you’ll have no reason to stack loans. Sign up today and enjoy the faster, more convenient, and result-oriented way to shop for business-friendly funding.
