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stacking business loans

The Danger of Stacking Business Loans

Got a couple of different credit cards in your wallet? A lot of people do. In the world of our wallets, it’s a widely accepted practice to carry a MasterCard and a VISA and maybe even one of those new Citibank Costco cards, too. And if you’re one of them, then you’re already familiar– in a personal, practical sort of way — with this thing called “stacking.” At its most basic, stacking means getting an unsecured loan or cash advance in addition to the one you already have.

In most day-to-day transactions, the practice of stacking isn’t likely to raise concerns or cause financial problems. But when it’s applied to the world of business loans, that’s a different story.

How stacking business loans happen

A small business with relatively substantial annual revenue needs new equipment, so the owner applies for an unsecured equipment loan for $40,000. The lender– a reputable one– performed their due diligence. They used proprietary algorithms coupled with expert screening to determine the appropriate size of the loan and the business’s ability to repay it. The business owner was approved for the full amount.

So far, so good.

But soon after the loan goes through, the owner starts getting calls and emails from other less-than-reputable lenders who’ve learned as a matter of public record that the business has been approved recently for a loan.

“We see you recently got a loan from Amazing Online Lenders. Did you get the amount you asked for? Or could you use a little more? We can offer you an additional $10,000 right now,” the messages say.

The business owner, with lofty dreams of regional domination, takes the bait. Not once, but three times, each from a different lender. He stacked business loans, but when the monthly payments were due, it became all too regrettable.

The pitfalls and perils

Stacking not only adds to a company’s financial burden, it also increases the risk taken by the lender of the initial business loan. That first lender made the decision to fund the owner based on the business’s financial condition at the time. With this new debt, it would likely have decided otherwise.

Small businesses that stack their loans often find themselves saddled with exorbitantly high interest rates. They struggle to make all those payments, or worst of all, default and end up going out of business.

There are some circumstances where a second unsecured loan might make good business sense for all parties involved. But as a rule, stacking isn’t a good idea. It violates the fundamental principles of responsible lending that ensure a loan is appropriately sized for a business’s needs and its ability to pay it back. When it comes to business loan stacking, a trustworthy lender will want no part of it.


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