When you run a small business, estimating your funding needs can be a difficult task. Occasionally, you may require funds beyond your initial business loan principal.
Some entrepreneurs seek additional funding from other small business lenders. Taking out multiple loans from different lenders is often referred to as “loan stacking.” Although you may need additional funding, loan stacking can lead to issues in the long run.
What are the risks of loan stacking?
Loan stacking becomes an issue if your business has difficulty repaying the loans. Your business may have trouble managing different due dates if you have too many repayments throughout the month. You may also run into issues making repayments according to your financing agreements if your repayments are too high. Loan stacking can negatively impact your cash flow and ability to save money for the future.
Late or missed payments can lower your business and personal credit scores. As a result, taking out too much credit from different lenders may also impact your ability to secure affordable financing in the future.
What are the alternatives to loan stacking?
If you need to secure additional financing, you may have alternative options to avoid loan stacking. Your financing options generally depend on various factors, including your credit score. However, the following alternatives may help you prevent loan stacking:
- Seek additional funds from your current lender: If you have a good relationship with your current lender, you may be able to borrow more money without the hassle of finding a different loan from another lender. In order to maintain a good relationship, aim to make payments on time. Good customers may also benefit from lower interest rates as your credit score improves over time. Read our guide to help raise your credit score.
- Refinance your loan: If your credit score improved since you took out a small business loan, you may be able to refinance your loan agreement with a different lender. Rather than juggling multiple repayments, a refinancing agreement would allow you to combine your outstanding loans into one loan with one payment.
- Consider complementary loan products: Utilizing some form of revolving credit, like a business line of credit or credit card, can help you avoid loan stacking. Because your revolving credit repayment is based on the amount that you borrow, you can help keep your outstanding debt down by only using the amount you need.