Loan Stacking Definition, Benefits, and Alternatives

Given what’s happened over the last several years—including the pandemic, significant supply chain issues and rising inflation—starting and maintaining a thriving business is certainly challenging. You know the old saying—you need to spend money to make money—but that means you need to have the money to spend.

With banks cutting down on lending to small business owners since the 2008 recession, many have turned to online lenders for funding, and some are even resorting to loan stacking. Let’s focus on what loan stacking is and take a look at its benefits, risks and alternatives.

What is Loan Stacking?

As you might surmise, loan stacking occurs when a borrower has more than one loan outstanding at the same time. That means you have multiple loan payments actively due since you took out multiple loans at the same time, thus stacking them.

Benefits of Loan Stacking

There are a couple benefits of loan stacking:

  • Owners can get more money even if they already have a pre-existing loan.
  • Instead of paying off an existing loan and taking on a new one, owners can potentially take a second position with a stacked loan.

However, there are some significant risks to loan stacking, much like when individuals run up the balances on multiple credit cards.

Risks of Loan Stacking

The first main risk of loan stacking is that having multiple loans puts added pressure on a business’s cash flow. Owners who engage in loan stacking may need more than one-quarter of their cash flow to cover debt payments—and if that becomes unsustainable you may try to take out even more loans to pay back the existing loans, entering a negative cycle of debt.

Loan stacking’s second main risk is that having multiple sources of credit could violate the terms of your initial loan agreement—automatically forcing that loan into default. Many online lenders have anti-stacking policies in their loan agreements because they want to ensure they’re in a “first lien position” in the event a business can’t repay its debt. Lenders don’t want to have to compete for collateral.

Alternatives for Loan Stacking

If you have an existing business loan, what should you do in the event you find yourself needing additional funds? Here are three alternatives to loan stacking:

  • Ask your current lender for more funding. Most lenders have policies that allow borrowers to get additional funds after they’ve paid back at least 50% of their original loan or have a history of making timely payments.
  • Refinance with more funding from another lender. This is like refinancing your home. You apply for a second loan from a less expensive lender that covers your existing balance with the first lender and provides you with more cash. You end up with one payment that’s usually lower than what you had been paying.
  • Look for complementary loan products. Consider pursuing a new business loan with different characteristics and repayment terms, such as a business line of credit and a short-term loan, business credit card and a loan, a short-term loan and an SBA loan, equipment financing and a loan or line of credit, or invoice financing and a loan or line of credit. These combinations work because you use the funds for different reasons and the underlying assets/collateral are different for each loan.

While loan stacking offers flexibility, can help business owners improve their credit in an expedited fashion and supports growth, it can be a slippery slope that puts the future of your business in jeopardy. Buyer beware is perhaps the best way to approach it—if at all.

Clear Skies Capital has helped many business owners determine the loan option that’s best for them and can answer questions about the pros and cons of loan stacking. Contact us today at 800-230-9822 to discuss your specific needs.