Were you recently approved for business financing? Congratulations! This is a crucial stage in the life of your business. What you do now will have a tremendous impact on the success of your business. In this article, we will provide some guidance so you can avoid over-leveraging your business. Business financing can provide the fuel for growth that your business needs, but it is critical to use sound business judgment when securing financing. The first step to successfully leverage your business with third-party financing is to avoid “stacking.”
What is Loan Stacking?
Loan stacking is the term for when a business applies for, and receives, funding from multiple online lenders. Stacking results in an increased debt-load, multiple daily or weekly payments, and increased risk of business insolvency. Responsible and thoughtful lenders, like Idea Financial, underwrite your business and determine how much you can afford to pay. When you stack one loan on top of another, you likely will be exceeding what your business can afford to pay, resulting in payment stress, and, in the worst cases, default on your obligations. Loan stacking is never a good idea, but with so many lenders soliciting your business to take more financing, it is understandable why stacking occurs so often. Make no mistake about it, stacking will not help your business.
View Financing Options with Caution
After you get your first business line of credit, other lenders or brokers will reach out to offer you more financing options for your business. Through the purchase of leads from third party data providers, lenders learn that you have recently taken business financing and target you for more debt.
While this idea might appeal to you, remember that combining your Idea Financial Line of Credit with other loan options from online lenders – or loan stacking – will not benefit your business in the long run. You may receive more cash now, but the likelihood that you will have difficulty servicing this debt increases with each new loan you take. And since Idea Financial provides your business with the amount of money that our proprietary program has determined you can afford, adding more debt is a recipe for future disaster.
How Loan Stacking Crushes the Value of Your Line of Credit
With Idea Financial, every time you make a payment on your line of credit, a portion of that payment is principal, replenishing your available credit and providing you with greater borrowing power. Businesses that use only one line of credit can quickly repay what they’ve borrowed to keep their debt levels low. They also ensure they have a steady stream of available cash to allow their business to grow responsibly. Businesses that use the Idea Financial line of credit as their sole source of financing are better prepared to respond to what their business needs; from payroll, investing in growth opportunities, purchasing inventory, marketing, or hiring.
Businesses that take on debt in excess of their approved line of credit add unnecessary and, likely, unintended risk to their business. In our experience, businesses that do not stack do not default. It is only the businesses that over-leverage that end up in default, insolvency and bankruptcy.