What is loan stacking?
Loan stacking involves taking out multiple small-business loans from different lenders — usually online lenders — within a short period of time. The idea is that, by applying with multiple lenders at once (or close together), you can access more money than any one lender is willing to provide. Some business owners do it as a way to game the system to get the full amount of funding they think they need. Others do it out of necessity.
In either case, loan stacking isn’t a great idea. Not only do you risk violating the terms of your loan agreements, but your business could go belly up if you take on more debt than your business can handle.
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How loan stacking works
Say you need $100,000, but you only get approved for $50,000 from one lender. You might take that loan and then apply for financing from other lenders to make up for the difference. Your total debt could look like this:
- $50,000 term loan.
- $35,000 business line of credit.
- $15,000 merchant cash advance.
In this scenario, you get the full $100,000. But now you have three different repayment schedules to manage. This can put a serious strain on your business, especially if you take on high-cost financing, like a short-term online loan or merchant cash advance.
Did you know...
Because many online business loans fund faster than they appear on a credit report, they make it easier to take out several loans simultaneously, or within a short time frame, which is how some fraudsters are able to exploit the system.
» MORE: Business loan calculator
Is loan stacking legal?
Loan stacking is legal, assuming you’ve been transparent with lenders and haven’t falsified your loan applications. But many lenders have policies against it. This means you could be in violation of your loan agreement if you don’t disclose all active loans or applications to lenders.
» MORE: What is credit card stacking?
Why you should avoid loan stacking
There are several risks involved with taking out multiple loans at once.
- Pressure on cash flow. Having multiple loans means more of your business’s cash flow will go toward recurring payments. As a result, you may have less money for everyday expenses, which can strain your business operations and potentially stifle business growth.
- Bad debt cycle. Taking on more debt than your business can handle may force you to borrow again just to make loan payments. This may be especially true if you mostly have online loans, which are usually more expensive than traditional loans. A bad debt cycle can increase your likelihood of defaulting, which hurts your business credit and can harm your personal credit if you’ve signed a personal guarantee or pledged personal assets as collateral.
- Violation of your loan agreement. Many lenders have policies against loan stacking. If a lender finds out you violated the loan agreement by stacking loans, it may demand immediate full repayment and blacklist your business.
- Vulnerability to predatory lending. Some dishonest lenders may go as far as searching public records to find businesses that recently accepted financing from reputable lenders. They then target those businesses with predatory loans.
Many predatory lenders make money when your business fails, says Louis Caditz-Peck, executive director of the Responsible Business Lending Coalition, a membership organization that promotes responsible financing practices for small-business owners. For example, they may impose steep fees for missing payments, forcing borrowers to take on more debt or default and surrender pledged collateral.
Expert on the ground
Louis Caditz-PeckExecutive director, Responsible Business Lending Coalition
How loan stacking can be done safely
Although loan stacking can be risky, if done correctly, with caution and transparency, it can be an effective tool to cover funding gaps.
Here’s how it should ideally work:
Have a clear purpose for each loan
Before you take out a bunch of loans, be clear about what you need each loan for and how you’ll pay each one back. A lender will also likely ask why you’re requesting multiple loans.
Ideally, each loan should serve a specific purpose. For example, you might use a commercial real estate loan to finance a remodel of an existing storefront, and a business line of credit to cover day-to-day expenses to anticipate a temporary dip in traffic from the construction.
Don’t take on more debt than you can handle
Just because you can qualify for more money from different lenders, doesn’t mean you should. “A small business should go into financing knowing specifically how much money they need to accomplish their goal. And don't borrow more than that,” Caditz-Peck says.
Make sure you do the math and consider what your monthly, weekly or daily costs will be and how it affects your business’s current cash flow. We have business loan calculators that can help with that.
Assess your qualifications
Before you apply for multiple loans, you should make sure you can handle the total repayment amounts and schedules. Generally, that means considering factors like the following:
- Available collateral. Although it’s not always necessary, assets that cover the total amount of capital you’re seeking can go a long way in getting multiple loan approvals.
- Revenue. Lenders rely on debt service coverage ratio (DSCR), which is a measure of your net operating revenue against outstanding debt, and indicates your ability to make payments on a new loan. Most lenders want to see a DSCR of at least 1.25 when taking out multiple loans. That means that for every dollar you’re paying toward debt, you’re making $1.25 in net operating revenue.
- Personal and business credit scores. If your credit score has dipped since your last application, or you have a personal credit score below 600, it’s unlikely you’ll be approved for multiple loans with a reputable lender.
» MORE: DSCR loan calculator
Find reputable lenders
Once you’ve assessed your qualifications, you can search for lenders with matching qualification requirements. Since you’ll be taking out multiple loans, you’ll want to prioritize the lowest rates and fees, and be cautious about how the repayment terms will fit into your business’s financial schedule.
Be wary of lenders that reach out to you directly with loan offers, especially if you’ve taken out financing recently. Any legitimate loan stacking should be initiated by the borrower.
Disclose all loans to your lenders
You should disclose any open applications or recently closed loans to every lender you’re working with, including the amount and projected monthly payments, if possible.
If the lender is unaware of certain loans you’ve taken out, it won’t be able to account for that debt in the DSCR, which means it may overestimate how much new debt your business can handle.
Alternatives to loan stacking
Before turning to loan stacking, there are other paths you should consider.
Refinance for a larger loan amount
If you need to access more capital and already have an active loan, you may be able to refinance your current loan for a higher amount than the remaining balance. Essentially this rolls your current balance, plus additional funding, into one new loan with one monthly payment.
To qualify for a higher loan amount, you’ll likely need to meet the same requirements you did for the first loan. You should also consider any prepayment penalties for paying off your current loan early, and whether you’re refinancing at a higher interest rate than your current loan.
Approach your current lender for more funding
It doesn’t hurt to ask your current lender what options you have. Some lenders may allow you to borrow more once you’ve proven yourself as a responsible borrower, especially if you’ve already paid off a large chunk of the existing loan.
Lenders will reevaluate your DSCR when you go back for more money.
Find complementary loan products
Loan stacking presents the biggest problem when a borrower has multiple loans with the same characteristics and repayment terms, or when multiple lenders have a security interest in the same asset.
However, it is possible for two distinct types of loans to healthily coexist.
As in our previous example, if you’ve been approved for a commercial real estate loan, you may consider opening a business line of credit to cover any incidental expenses that come with your new property purchase. This combination works because the borrower uses the funds for different reasons, and the underlying assets/collateral are different for each loan. Of course, you should still disclose both loans to both lenders in advance.
» MORE: Can you have multiple SBA loans?
