The hidden risks of loan stacking
Running a small business is no easy task, and sometimes, securing the right financing can feel like a challenge. In your search for capital, you might come across multiple lenders offering attractive loan options. It may be tempting to take on several loans at once to meet your immediate needs, but this practice, known as loan stacking, can negatively impact the financial health of your business.
What is loan stacking?
Loan stacking is when a business owner takes out multiple loans from different online lenders in a short period, often without being required to disclose their existing debt to each lender. This might seem like a quick solution to address cash flow issues or fund new opportunities, but it can quickly spiral into a situation where debt becomes unmanageable. What begins as a strategy to secure funds can end up putting your business at risk.
The danger of over-indebtedness
When you stack loans, you’re taking on multiple repayment obligations. Each loan comes with its own terms, interest rates, and payment schedules. While one online loan might be manageable, several online loans can create a complex financial situation that strains your business’s cash flow.
Instead of solving your financial problems, loan stacking can lead to over-indebtedness, where your business is unable to keep up with multiple debt repayments. This not only affects your ability to meet operational costs but can also push your business closer to defaulting on loans.
Credit score consequences
Your business credit score is crucial in determining your ability to secure future financing. Loan stacking can have a negative impact on your credit score in multiple ways. Each loan application can trigger a hard inquiry on your credit report, and too many inquiries in a short time can lower your score.
In addition, the increased debt load can make it appear as though your business is overextended, leading to a further drop in your credit rating. A lower credit score can make it more difficult and more expensive to obtain financing in the future.
Higher interest rates and fees
Reputable lenders consider stacked loans a red flag. If they become aware that you’ve taken on multiple loans, they may respond by increasing your interest rates or adding fees to mitigate their risk. This not only raises the cost of borrowing but can also lead to a cycle where you’re forced to take on even more debt to cover the escalating costs, further entrenching your business in financial difficulties.
Legal and contractual issues
Many loan agreements contain clauses that restrict you from taking on additional debt without notifying the lender. When you stack loans, you may inadvertently violate these terms, leading to legal consequences.
Lenders might recall the loan, demand immediate repayment, or take legal action to recover their funds. This can result in severe disruptions to your business operations and damage relationships with lenders that you may rely on for future financing.
Long-term impact
While loan stacking might provide short-term relief, the long-term consequences can be detrimental. As you become more indebted, your options for future financing dwindle. Lenders may view your business as a high-risk borrower, making it harder to secure the funding needed for expansion or to navigate future challenges.
A better approach to financing
Instead of resorting to loan stacking, consider other financing options that better suit your business’s needs. Explore lines of credit, work with a trusted financial advisor, or look for lenders who understand your business’s unique challenges. At Journey Capital, we believe in providing transparent and responsible financing solutions that help your business thrive.
Taking a thoughtful and strategic approach to your business’s finances will not only protect your business’s financial health, but also set you on a path toward sustainable growth and long-term success.