Should You Use Credit Card Stacking to Fund Your Business?
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Credit card stacking is a method of financing that allows small businesses to increase the amount of capital they can access by opening multiple credit accounts. An alternative to small-business loans, credit card stacking can be a solution for startups or businesses that are having trouble accessing traditional methods of funding.
What is credit card stacking?
Credit card stacking is an alternative method of small-business financing that “stacks” multiple business credit cards to increase the amount of total capital a small business can access. Credit card stacking can be done individually by applying for multiple credit cards at once, or via a third-party company — sometimes called a stacking lender — that will help you find and apply for multiple credit cards.
Business credit card requirements tend to be more lenient than traditional business loans on things like length of time in business or minimum revenue. However, card issuers still require business owners to have good-to-excellent personal credit — typically a score of about 690 or above — for approval. That makes credit card stacking a good method for pre-revenue startup businesses, or businesses that are having trouble qualifying for traditional financing for reasons other than poor credit, like a lack of collateral.
The downside to credit card stacking is it can be expensive and difficult to manage, making for a risky form of financing if payments get on top of you. If you don't pay down your balances each month, interest can accrue quickly, trapping you in a bad cycle of debt.
Credit card stacking is different from refinancing debt or consolidating debt, which involve taking out a new loan at a lower interest rate or to combine multiple monthly payments. It also differs from transferring a credit card balance, whereby you move the balance of one credit card to another with a lower interest rate.
How does credit card stacking work?
Credit card stacking can help businesses get approved for more funding than they might with a traditional loan, does not require collateral and can even help you avoid paying interest altogether; however, there are inherent risks.
Here’s how it works:
Find and apply for credit cards
Before you start applying, you’ll want to make sure you’re prepared to apply for multiple credit cards at once. That’s because some providers are inquiry-sensitive and won’t approve you if they see a lot of recent credit inquiries on your report. You can also try targeting cards that pull from different credit bureaus to avoid this issue.
When thinking about which cards to apply for, you should prioritize 0% introductory annual percentage rate (APR) periods to minimize interest, cards that offer cash-back rewards or cards that provide specific B2B benefits.
You can pursue credit card stacking on your own, or opt to work with a stacking company. These companies come with their own benefits and drawbacks. They may be able to help you find the best credit card offers and handle your applications with each bank. They may also provide counseling to your business after you’re approved to help you leverage your credit lines, manage payments and improve your overall business credit.
However they can be costly — stacking companies may charge an upfront membership fee before you get funding, or they may collect a fee on the back end — anywhere between 8% and 12% of the total amount of funding you receive. Also, keep in mind that applying with a stacking company may take longer than getting approved for credit cards yourself.
Access multiple credit lines
Once you are approved, each card will come with its own pre-set limits, which you can combine to get your total available credit. You may choose to spread business purchases out over all your credit cards or spend only on the card with the lowest interest rate. If the card permits, you may also choose to get cash from your credit line; however, be wary of any fees associated with cash advances, which can be up to 5% of the advanced amount.
Pay down and redraw balances
Ideally, you will pay off your entire balance on each card every cycle before the balances accrue interest. This method will help you save money, and ensure that payments don’t get on top of you and cause damage to your business’s finances. Credit cards are revolving, which means you can draw on them up to your limit again once you’ve paid the balance off.
Credit card stacking pros and cons
Pros
No collateral or equity required. Business credit cards are unsecured lines of credit, meaning they don’t require collateral, and they don’t require you to trade ownership in your company, like some other methods of startup funding.
Access funding quickly. Applying for a business credit card can typically be done online and doesn’t require the same documentation as a typical loan, which can make for an expedited process. Approval can be as quick as a few minutes, and with a digital version of the card, you may be able to start spending on the credit line instantly.
Can help build business credit. If executed correctly, credit card stacking can help you build your business credit, which can help establish your business and open up other funding opportunities in the future.
Cons
High interest rates and fees. Credit card stacking can be devastating to your business if you take on more than you’re capable of repaying, or you are not diligent about paying down your balances each cycle. Credit card APRs can fall between 20% and 36%, which can add up very quickly if you carry balances and have multiple accounts. Also, don’t forget about card annual fees, which can reach upward of $700 annually.
Requires you to manage multiple accounts. You will have to manage multiple accounts and payments at once, which can be a lot on top of managing other bills for your business, and can make it easy for you to fall behind.
Can impact your personal credit. Even though the credit card accounts are opened under your business’s name and therefore won’t appear on your personal credit report, they can still have an impact on your personal credit score. The credit card company will likely make a hard inquiry on your personal credit to approve you for the card. Due to the nature of credit card stacking, you are looking at multiple hard credit inquiries in a short time span, which will affect your credit in the short term. In addition, most credit cards require a personal guarantee, which means if you default on a business credit card, it could negatively impact your personal credit history.
Alternatives to credit card stacking
If credit card stacking sounds too risky for you, there are plenty of other options, based on your business needs and stage of growth.
Business lines of credit
Best for: Small businesses that need revolving funding.
If your business regularly needs to cover cash-flow gaps, you may consider applying for a single business line of credit. Business lines of credit are available from banks and online lenders, and can have limits over $250,000. Some non-bank lenders — like Headway Capital and OnDeck — also have lower credit score requirements than the average credit card.
Online term loans
Best for: Small businesses in need of fast capital.
Online lenders can offer an expedited process with term loans up to $1.5 million. Although same-day funding may be available, online loans typically have higher APRs and less favorable terms than traditional loans.
Invoice financing
Best for: B2B businesses with cash tied up in receivables.
If your business has a lot of money tied up in accounts receivable each month, invoice financing may be a viable option. Also called accounts receivable financing or invoice discounting, invoice financing allows you to use your unpaid customer invoices as collateral on short-term small-business loans.
CDFI loans
Best for: Business owners with poor personal credit.
If you’re facing credit challenges and don’t need a lot of funding, you can look for loans from community development financial institutions (CDFIs). CDFIs are non-bank lenders that typically serve underserved communities and may have more flexible qualification requirements.
Equity financing
Best for: Pre-revenue startups or companies in the early stages of growth.
Startup companies may benefit from equity financing, which involves raising capital for your business by selling ownership, or equity of your company. Equity financing may come from venture capital firms or angel investors, and it is a debt-free method of financing your business. However, ownership and control of your business can be at risk.
» MORE: Debt vs. equity financing
