Companies, especially smaller companies, sometimes stack loans to get the necessary capital to grow. Starting a profitable business can be difficult, and working without outside capital and building your business from the ground up with only your personal savings (called “bootstrapping”) is notoriously difficult.
With loan stacking, business owners can apply and be approved for multiple loans within days (sometimes hours), allowing them to draw on funds quickly. It works because the time between approving the loan and delivery of the funds is often much shorter than the time it takes to report the loan to credit-reporting agencies.
In theory, loan stacking sounds like a smart strategy for small businesses. But since each loan increases the debt burden on your business — which increases the likelihood of default — loan stacking isn’t all it’s cracked up to be.
What Is Loan Stacking?
Loan stacking is taking out more than one loan without your creditors knowing it.
Perhaps you have office expenses, payroll, and rent to pay, but there’s not enough money. Or maybe you need more capital to pay for new inventory or an upgrade to your computer equipment. You head over to Acme Credit to take out a loan. You apply, but they approve you for a lesser amount than you need.
But applying for a loan is part of the public record, so FasterLoans calls and says they can approve you for any money Acme doesn’t approve. If you take out the second loan from FasterLoans in addition to your first loan from Acme, you’re loan stacking, or having multiple loans on the books at the same time.
Although FasterLoans doles out the money you need, having the additional loan could become a problem for you — and for the first lender, who’s counting on you to be able to pay back their loan.
Is Business Loan Stacking Legal?
Loan stacking isn’t illegal, but many people frown upon it for obvious reasons. First, loan stacking often involves at least one party who’s engaging in fraudulent activity. For example, unscrupulous lenders sometimes falsely report the number of loans they’re servicing for a specific borrower to a credit bureau.
In some instances, you can find yourself dealing with a lender that uses high-pressure or dishonest sales tactics to convince you to take on more debt than you can possibly pay back. At other times, unscrupulous lenders contact you about “special promotions” shortly after you’ve secured an existing loan.
Likewise, you may make a hasty decision simply because you need more money than any single lender can provide or is willing to give you. Honest lenders try to ensure business owners aren’t stacking loans.
Different companies have different financing needs. Building websites from a home office doesn’t require much financing, while opening a food truck costs between $60,000 and $250,000, according to industry publication FoodTruckOperator.com. And building a manufacturing plant or opening a car dealership can require millions for startup costs like a building, inventory, and licenses.
When a company applies for a loan, the lender takes everything into account, including known income, accounts receivable, accounts payable, debt, creditworthiness, and collateral. To ensure the applicant can pay back the loan, most lenders don’t lend more than a company can handle at the time based on their financial health.
But some lenders are more interested in profit and instead try to attract current loan holders with offers of additional capital.
How to Spot Unscrupulous Lenders That Allow Loan Stacking
Loan stacking makes business owners vulnerable to unscrupulous lenders who target companies with unsecured loans or merchant cash-advance products from other lenders. These unscrupulous lenders have organized their businesses to allow for — and even encourage — stacking by struggling business owners.
They capitalize on another lender’s underwriting work by targeting people or businesses that have already gone through the first lender’s approval process. They care little for your financial well-being or about growing a strong business relationship.
Encouraging loan stacking is a type of predatory lending. The goal is to write loans that might lure a borrower into a cycle of debt. They trick or trap borrowers into loans they can’t afford or don’t really understand. That often includes imposing abusive or unfair loan terms on borrowers.
Predatory lenders set a very high APR on loan packages, often lend too much money, and do scant or “soft” credit checks. A soft credit check looks at information on a person’s credit report without impacting their credit score. It prevents other lenders from seeing the full details of a borrower’s existing debt load. That’s useful when you’re shopping for a loan. It prevents your credit score from taking a hit just before you try to get credit, potentially increasing your interest rate. But unscrupulous lenders can use it for less-than-noble purposes.
Many of these lenders use automated systems that can provide almost instantaneous loan denials or approvals based on these soft credit checks. A borrower can then take out multiple loans in succession without another lender finding out, at least in the short term.
By contrast, honest and responsible lenders prohibit borrowers from stacking loans as part of their contract. They run in-depth credit checks on your company’s finances to ensure you aren’t borrowing more than you can handle. They only lend what fits into your business’s budget, ensuring you can pay back the loan according to its repayment terms.
They provide all the information you need to do your d
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