The Risks of Loan Stacking

By Amy Thompson

Jul 22, 2022

2 min read

Being a small business owner can be extremely gratifying, but it certainly comes with many challenging tasks. Sitting at the top of the list is estimating funding needs. Perhaps its expansion, assets, or other unforeseen expenses, there are many reasons a small business could need additional financing. Occasionally owners will find one loan isn’t sufficient and may seek additional funding from other lenders. Applying for and receiving multiple loans from different lenders at once is called loan stacking.

For instance, let’s say your business is doing well and you decide to take on an expansion in products. You’ve estimated you will need an additional $25,000 to cover costs and services. You apply for the total amount with one lender but are only approved for a portion of what you need, so you seek loans from other lenders to cover the additional funding required, ending up with multiple loans.

Although loan stacking might seem like a simple fix, it can be risky for small business owners. Taking out additional loans could affect you and your business in these ways:

  1. Additional loans could violate the terms of your first loan agreement.
  2. Multiple loan payments can put a significant strain on your business’s working capital.
  3. Numerous outstanding loans could negatively affect your business credit score and your personal credit score.
  4. With outstanding debt, terms on new loans may not be as favorable and cost you more in the end.

Depending on the business needs, there are options when a borrower needs more funding.

  1. Speak with your current business lender. Staying in good standing and maintaining an open line of communication with your current lender is vital. When you need additional funding, talk with them first. Request that they evaluate your opportunities for more funding and better terms. Be prepared to show them why you merit the additional capital and how you plan to use it.
  2. Refinancing your first business loan is another good alternative to loan stacking. You’ve worked hard to grow your business and increase revenue, all while making on-time payments to your current loan. Use that to your benefit, and instead of taking on additional loan payments, replace your existing loan with another that offers better terms and will give you the extra funding you need.
  3. Explore complimentary loan products like a business line of credit, credit card, or equipment financing. These types of loan products work with a business loan because they are used for different reasons, and the guarantees differ for each loan. For instance, you have a short-term loan used to purchase products and supplies, which places your business assets as a guarantee. You have a separate loan specifically for equipment financing that puts the equipment itself as the guarantee.

Protect yourself and your business by avoiding the temptation of loan stacking. What appears to be a simple fix can lead to a never-ending cycle of debt and major hardships in the future. There are better options; consider the alternatives and speak with your lender.