Say no to stacking loans: why it's bad for business
If you’re considering taking out another small business loan, make sure you’re informed on the risks of stacking loans. Although having additional working capital may seem like a win-win, it can be very risky for your business, and the two lenders involved.
What is stacking?
If you haven’t heard of stacking loans, let’s start with a definition. Simply, stacking loans is when a small business has multiple loans. You may be asking yourself, “What’s wrong with that?” The answer is that you may be causing irreversible damage to your business if you partake in stacking loans.
Acquiring working capital can really help you grow and improve your business. Whether you need money to fund future projects, pay bills, or purchase equipment, applying for merchant funding or a small business loan can be the solution your business needs. While it may be tempting to seek additional financing once you’ve received capital for your business, taking out an additional loan can be a serious issue for all parties involved. Read this post to find out how you can master working capital management and avoid stacking.
Why is it harmful?
Taking out two loans may seem risk-free, but repaying two lenders at the same time could be a major financial burden on your business.
Think about the application process you went through with the first lender. They probably did a thorough analysis of your business’s financial details and how your company operates. At the end of the process, they provided your business with capital and decided on either a fixed daily amount or a percentage of your sales that they felt you’d be able to handle without harming your business. If you apply for another loan with a second lender and they go through the same process, you may now be paying back $200 a day instead of $100, or 6 percent of your sales, instead of 3 percent. It’s possible that your business wouldn’t be able to handle paying back both lenders at the same time, causing damage to your business and the lenders.
What’s the solution?
The solution to avoid stacking loans is to contact the company you received the first round of financing from, and discuss your concerns and need for additional capital. This is a more responsible way for potentially acquiring more capital, or coming up with a better business loan payment schedule. Keep in mind, the lender that already provided you with working capital is invested in the success of your business, and won’t want you to struggle due to capital constraints. They can give you more capital responsibly since they already know your business, and your small business loan repayment will only be to one company.
It is important for businesses to learn about working capital management prior to taking out a loan. At Fora Financial, we love helping small business achieve their goals. We ensure that good lending practices are upheld, and that includes not stacking loans. Since stacking can negatively affect both the small business and the lenders, it should be avoided by all parties involved.