stacking loans

Stacking Loans: Everything You Need to Know About It

Ezra Cabrera | December 8, 2022


    During the 2008 recession, big banks and credit unions have been wary of lending money to small businesses. This made it hard for them to secure the working capital needed to fund their operations. As a result, many small business owners have decided to stack two or more loans from one or multiple lenders.

    While this may seem like a great idea, taking on more than what you can handle can quickly put you in a cycle of debt that’s difficult to come out of. Understanding loan stacking, its risks, and other alternatives are important before you start stacking loans.

    Key Takeaways

    • Loan stacking refers to taking out two or more loans simultaneously. This may seem like a great way to reach a financial goal, but there are risks associated with it.
    • Many lenders do not allow loan stacking because they don’t want to compete with other lenders over collateral in case you can’t repay your loans.
    • Loan stacking can also put you in a cycle of debt that’s difficult to get out of. Some lenders ask for daily or weekly payments, which can be bad for your cash flow.
    • Alternatives to loan stacking include reducing expenses, asking for additional from your current lender, applying for complimentary loan products, and refinancing your debt.

    What is Loan Stacking and How Does It Work?

    Loan stacking means getting multiple loans from different lenders at the same time to meet a financial goal.

    Here’s an example of loan stacking: You’re planning to expand your store, but you’re short on funds. You did your math and found that you’ll need $30,000 to complete the project, so you find a lender and apply for the total amount but only got approved for $15,000.

    To get the other $15,000, you find another lender and apply for a second loan. The second lender approves you for $7000, so you see a third lender that approves you for $8,000.

    What are the Risks Involved in Loan Stacking?

    Financial advisors discourage small business owners from stacking loans because

    (1) It adds more pressure to your business’s cash flow.

    (2)   You may enter into a negative cycle of debt that’s difficult to escape.

    (3)   Many lenders have an anti stacking policy.

    Added pressure to your business's cash flow

    Stacking loans can be a quick fix solution for small business owners looking to address cash flow issues. Nevertheless, it's also important to consider the repercussions of taking out additional loans.

    When small business owners use stacked loans to address their cash flow problems, it not only increases their debt level but also adds pressure in terms of repaying multiple creditors. Aside from increasing your risk of defaulting due to having too many loan payments at once, it can also make it harder for you stay on top of your payments.

    You may enter a negative cycle of debt.

    Studies show that small business owners spend more than a fourth of their cash flow to pay for debt payments. Some online lenders ask for daily or weekly payments with high-interest rates, which worsens cash flow issues. Business owners are pushed to take out loans resulting in multiple loan payments actively due, making it easier to be in a negative cycle of debt.

    It could lead to default if you’re unable to repay the loan. This means lenders could repossess your personal and business assets, your credit score will take a hit, and you may be asked to repay the full amount.

    a man holds his head while sitting on a sofa

    Many lenders do have an anti stacking policy.

    Some lenders do not allow loan stacking, even if you can demonstrate that you can easily repay multiple loans. Your agreement with your primary lender should outline whether you can apply for additional loans before your loan with them is repaid. For some, violating your loan agreement would automatically mean a default.

    Let’s say you secured a loan from an alternative lender. They usually ask for a personal guarantee and file a blanket lien on your business assets. This means the lender has the right to repossess and sell your assets to repay your debt. Prohibited loan stacking means you’re interfering with your lender’s lien, so you automatically default on your loan.

    Lenders don’t like loan stacking because they don’t want to compete over collateral if you default on the loan. If you have multiple loans that you can’t repay, Lender #1 might seize the collateral Lender #2 also wanted to get to cover the default, leaving less money for the second lender. Keep in mind that lenders always make sure they can collect their loans no matter what. This is why many alternative lenders prohibit loan stacking in their agreements.

    Note: The rules regarding loan stacking vary from lender to lender. Contact your lending company or review your loan agreement to check if they allow loan stacking. Aside from automatically defaulting on the loan, violating your agreement may also expose you to several legal proceedings against you and your business.

    What are the Alternatives to Loan Stacking?

    You don’t have to stack loans to reach your financial goals. Here are some of the alternatives you can check out:

    Reduce your expenses.

    If you’re planning to stack loans to keep up with the bills, you might consider eliminating or reducing your expenses. Evaluate your business and see if you can do the following:

    • Negotiate better terms with your supplies or reduce your orders.
    • Barter your services to your vendors for free in exchange for materials or supplies.
    • Consider working from home and/or have your employees telecommute if possible.
    • Move to a less expensive location.
    • Eliminate any contracts or maintenance plans you don’t necessarily need.
    • Cut back on your office or store’s utility bills.

    Revaluate your priorities and check if there are areas you can cut back on both short- and long-term expenses.

    Ask your current lender for additional funding.

    If you’ve already established a relationship with your current lender, they might approve you for additional funding under the right circumstances. Some lenders allow small business owners to receive more money if they’ve repaid at least 50% of their existing loan and/or made timely payments. However, you need to demonstrate why you should be approved for more capital, like an increase in business revenues or a good personal credit report.

    When you request additional funding, lenders check your debt service coverage ratio (DSCR), which measures your capacity to cover debt payments. To get your DSCR, divide your business’ annual net income by interest and yearly loan payments. You should get at least 1.2 after adding the additional funding. If this isn’t the case, you’ll need to return when your income increases.

    Keep in mind that if you’ve been late with payments on your current loan, you may not be able to get additional funds.

    woman writing on paper on table near lapop

    Refinance your debt.

    Debt refinancing is getting another loan with better terms to pay off existing debt. Ideally, the second loan has lower interest rates, better repayment terms, and other cost-cutting terms that could further reduce your debt. Debt refinancing loan products are available through banks, credit unions, and alternative lenders.

    You can also use SBA loans like 7(a) and Express loans to refinance debt. The Small Business Administration guarantees a portion of the debt refinancing loan through SBA-accredited banks and lenders. However, they will not guarantee to refinance the existing loan you’re trying to pay off.

    Apply for complementary loans.

    Loan stacking is risky when you borrow two or more loans with similar terms and rates or different lenders have a lien on the same asset. But there are business loans that can healthily coexist – just like when a consumer has a car loan and a student loan at the same time.

    It works because borrowers often use the loan for different purposes, and the collateral used differs for each loan product.

    Here’s an example: Suppose you own a construction business and applied for a business line of credit from an online lender and an equipment loan from another. You’ll likely use the line of credit to fund emergency expenses or day-to-day operations and repay the loan before you go over the limit. The line of credit lender also placed a lien on your personal assets.

    The equipment loan is used to buy heavy equipment needed for your construction company, and you repay it with fixed monthly installments over five years. The heavy equipment is the collateral for the loan, so the lender can seize your assets in case you default, while the line of credit lender has the rights to your personal assets.

    Here are some examples of complementary financing products:

    How to Protect Yourself from the Risks of Loan Stacking

    There are two ways loan stacking can happen: borrower-initiated and lender-initiated.

    Borrower-initiated Loan Stacking

    In this type of loan stacking, the borrower is the one who seeks out and applies for another loan. This is easy to avoid because you obviously only have to refrain from getting another loan.

    Lender-Initiated Loan Stacking

    Lender-initiated loan stacking is where a lender reaches out to you and offers you a new loan. Beware of these predatory lenders because their strategy is to look through public records to see which businesses recently took out financing. They will try to contact these businesses and sell business loans with poor terms that will eventually affect your personal and business credit score.

    Protect yourself from these unscrupulous lenders by researching any lender-initiated offer. Ask questions, check online reviews, review the loan terms they’re offering, and more. You can also talk to a financial expert who could help you understand the fine print and avoid any scams and agreements that could hurt your business.

    person writing on white paper

    The Bottom Line

    Loan stacking may seem like a great option, especially when you desperately need the funds. But the cons usually outweigh the pros. On top of that, it could negatively affect your relationship with your lenders, hindering you from applying for loans moving forward.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.