Should You Use Loan Stacking to Fund Your Business?

Loan stacking involves taking out multiple small-business loans within a short period of time to allow business owners to increase the overall amount of money they can access. This method can work in certain situations, but the risks involved — both for lenders and borrowers — make it tricky to execute and typically best left as a last resort.

Loan stacking refers to the process of taking out multiple business loans from different lenders at the same time, or within a short time frame. In theory, this method of business financing can help you access more capital than you could from a single lender.

Although it is legal, many lenders have policies against loan stacking, which means you could be in violation of your loan agreement if you don’t disclose all active loans or applications to lenders.

Predatory lenders may also use loan stacking to target vulnerable businesses. They may encourage businesses with current loans to take out new financing with hidden high costs and without regard for whether or not the borrower will be able to repay.

While the only real advantage to loan stacking is maximizing your access to capital, there are several risks involved with taking out multiple loans at once.

• Bad debt cycle. Taking on more than your business can handle can trap you in a bad cycle of debt. This may be especially true if you primarily have online loans, which tend to be more expensive than traditional loans. A bad debt cycle may increase your likelihood of defaulting, which hurts your business credit and can harm your personal credit if you’ve signed a personal guarantee or pledged personal assets as collateral. 

• Pressure on cash flow. Having multiple active loans increases the amount of your business’s cash flow that you’ll need to put toward recurring payments. This can put added pressure on your business operations and potentially stifle business growth. 

• Violation of your loan agreement. Some lenders have explicit policies against loan stacking, which means you may be in violation of your loan agreement if you take out multiple loans at once.  

• Vulnerability to predatory lending. Some unscrupulous lenders may go as far as searching public records to find businesses that recently accepted financing from reputable lenders, with the intention of targeting those businesses with predatory loan products. Predatory lenders aren’t concerned with your business’s ability to repay the loan. Furthermore, loans from predatory lenders often come with hidden fees that make the cost of borrowing nearly impossible to manage. 

Although loan stacking can be risky, if done correctly, with caution and transparency, it can be an effective tool to cover funding gaps.

Here’s how it should ideally work:

Before you apply for multiple loans, you should make sure you can handle the cumulative repayment amounts and schedules. Generally, that means considering factors like the following:

• Available collateral. Although it’s not always necessary, assets that cover the total amount of capital you’re seeking can go a long way in getting multiple loan approvals. 

• Payments for each potential loan. You may not be able to get exact numbers, but make sure you’re considering the monthly, weekly or daily cost you’re adding and how it affects your business’s current cash flow. Reputable lenders will also look at your repayment capacity, so it helps if you have a general idea of what you can afford. 

• Personal and business credit scores. If your credit score has dipped since your last application, or you have a personal credit score below 600, it’s unlikely you’ll be approved for multiple loans with a reputable lender. 

• Use of funds. To avoid taking more than you need, you should have a clearly defined purpose for each dollar of capital you’re seeking. A lender is also likely to ask why you’re requesting multiple loans, so you should be able to articulate these needs. 

Once you’ve assessed your qualifications, you can search for lenders with matching qualification requirements. Since you’ll be taking out multiple loans, you’ll want to prioritize the lowest rates and fees, and be cautious about how the repayment terms will fit into your business’s financial schedule.

Be wary of lenders that reach out to you directly with loan offers, especially if you’ve taken out financing recently. Any legitimate loan stacking should be initiated by the borrower.

You should disclose any open applications or recently closed loans to every lender you’re working with, including the amount and projected monthly payments, if possible. Lenders rely on debt service coverage ratio (DSCR), which is a measure of your cash flow against outstanding debt, and indicates your ability to make payments on a new loan. If the lender is unaware of certain loans you’ve taken out, it won’t be able to account for that debt in the DSCR, which means it may overestimate how much new debt your business can handle.

Before turning to loan stacking, there are other paths you should consider.

If you need to access more capital and already have an active loan, you may be able to refinance your current loan for a higher amount than the remaining balance. Essentially this rolls your current balance, plus additional funding, into one new loan with one monthly payment.

To qualify for a higher loan amount, you’ll likely need to meet the same requirements you did for the first loan. You should also consider any prepayment penalties for paying off your current loan early, and whether you’re refinancing at a higher interest rate than your current loan.

It doesn’t hurt to ask your current lender what options you have. Many lenders have policies that allow borrowers to receive additional funding after they’ve paid back at least 50% of their original loan or made timely payments over several months. Lenders will reevaluate your DSCR when you go back for more money.

Loan stacking presents the biggest problem when a borrower has multiple loans with the same characteristics and repayment terms, or when multiple lenders have a security interest in the same asset.

However, it is possible for two distinct types of loan products to healthily coexist together.

For example, if you’ve been approved for a commercial real estate loan, you may consider opening a business line of credit to cover any incidental expenses that come with your new property purchase. This combination works because the borrower uses the funds for different reasons, and the underlying assets/collateral are different for each loan. Of course, you should still disclose both loans to both lenders in advance.