Running a business is exciting, rewarding, yet tough. There are lots of moving pieces and one that business owners deal with on an ongoing basis is financing. What owners do with financing determines the financial health of their business.
If you are a business owner that has received financing from banks or other lenders, or if you are in the process of securing financing, you are most likely aware about the many funding options and providers you can use. Chances are that many providers, online lenders in particular, are offering you seemingly attractive interest rates and large loan amounts. It is tempting to take not just one but many of these loans, but doing so may jeopardize the financial health of your business.
What is ‘loan stacking’?
When you take multiple loans from multiple providers you are practicing what people in the business lending industry call ‘loan stacking’. Say you need $20,000… ABC Lending gives you $10,000, Loans-R-Us gives you the other $10,000. Now you are all set with your $20,000, great! Not so fast, while taking multiple loans may get you to raise the funds you need, you expose your business to unintended risks.
Loan stacking is risky business
If you take loans from multiple providers you run the risk of:
- Breaking your contract terms with one of the providers. Some providers prohibit stacking. If you have a line of credit and you stack, your lender may freeze the line of credit, which means you won’t have access to funds from it anymore.
- Unsustainable debt build up. Typically, lenders give you a loan amount that your business can afford. When Loans-R-Us lends you $10,000 they think your business will be able to pay back the $10,000 plus interest without necessarily knowing that you have one or more multiple loans already. Now, nobody understands your business like you do. You know best how much financing you can afford. Be aware that stacking could lead you to higher payments and interest costs, which in turn could lead you to a vicious debt cycle that is difficult to get out of.
- Loan defaults. Unsustainable debt and breaking contract terms are not the only issues with stacking. The more loans you have, the more repayment schedules you will face. Some of these payments come in the form of daily, weekly, bi-weekly payments and are debited from your bank account automatically. The more loans you have the higher the chances that automatic debits can trigger NSFs flags at your bank, leave your bank account with a negative balance, and potentially make you default on a loan.
How to avoid stacking
You know your business and care for it like no one else does. The best way to avoid stacking is to understand that more loans, more financing does not mean more value for your business. Reading the fine type helps as well. Quite often, lenders offer financing terms that may seem attractive but include clauses that could put your business in jeopardy.
The type of financing is important to understand as well. Term loans and merchant cash advances are rigid and force you to take the full amount offered to you, whether you need that amount or not. This forces you to make payments that could be lower if you financed a lower amount. A business line of credit, on the other hand, lets you choose the amount you want to finance up to the credit limit offered to you. This lets you control your payment amount and interest costs.
The folks here at Idea Financial created a revolving line of credit with flexibility, affordability and business owners in mind. With the Idea Financial Line of Credit you get to choose how much you want to draw. As you make payments to your line, your line of credit is replenished so that you have access to more capital, which you can use later when you need it. The Idea Financial Line of Credit gives you access to financing with one single payment schedule at a lower interest cost than competitors, so that you avoid stacking as an option for your business.
The financial health of your business is extremely important for your success. If you’re not certain with specific terms to the loans being offered to you, do not hesitate to reach out to Idea Financial. Our team of dedicated business advisors have your best interest in mind and will provide you with non-biased, consultative financial advice about the loans you’re being presented with.