Loan Stacking is Bad for Your Business

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• 3 minute read

Have you heard of loan stacking? If you’re unfamiliar with the term, loan stacking is where a loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics and payback terms. While many business owners may have not heard of the term, there are a number of negative small business loan stories that can be attributed to stacking.

Here’s how it happens. You go to a lender, like us here at OnDeck, you complete an application and get approved for a loan. Let’s say you borrow $75,000. A UCC filing is made typically with the office of the secretary of state where your business is located. This may happen with a loan where there is a security interest, whether it’s from the bank or any other lender. The filing basically provides notice to the world that your business has existing debt.

A second lender, who you don’t know and likely have never spoken with before, sees the filing (because it’s part of the public record), and calls to say, “I see you just got a loan from, for example, OnDeck, did you get all you needed? Could you use a little more? We could offer you an additional $10,000 right now.”

If a business owner says “yes” to these offers – sometimes multiple times – it could create a situation for the small business owner where he or she will struggle to repay the loans. This is not only a major problem for the small business owner, but it also increases risk for the first lender.

Unfortunately, there are lenders out there whose entire business model is based upon detecting recent loans made by a first, credible, lender, and then attempting to stack one of their loans or merchant cash advances on top of the original loan. Frequently, these lenders are familiar with the underwriting model and approval process of the first lender and thereby can guess at the creditworthiness of the borrower. Basically these actors are capitalizing off of the diligence of the first lender—and significantly increasing the risk to the small business and the original lender by adding additional debt. They do this because there will be a percentage of business owners who are actually able to service the debt, but there are many who can’t.

Many lenders, including OnDeck, are opposed to these practices and have an anti-stacking policy. And we discourage our borrowers from stacking another loan on top of an OnDeck loan. The risks to the borrower of piggybacking one similar loan on top of another is too great. A responsible lender ensures that a loan is appropriately sized according to a business’s performance and ability to repay, and that the loan is an appropriate fit for the intended use. Stacking violates these sound principles.

It is important to note that stacking is different from using the proceeds of a second loan to pay off the balance of a first loan in order to acquire additional funds. In this case the second lender can evaluate whether or not to approve the additional debt, and the balance on the first loan is completely repaid. This is a responsible way for the borrower to acquire additional funds if needed. It enables a legitimate approval process to take place before a second loan is approved, and prevents a borrower from taking on an unsustainable debt-burden.

Loan stacking is a bad practice used by unscrupulous lenders and puts businesses at risk of default and bankruptcy.