Credit Cards

What Is Credit Card Stacking

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

Loan stacking is a common way for businesses, especially startups, to acquire the growth capital they need. Bootstrapping refers to the practice of starting a business with no outside investment and growing it from the ground up using just your personal money.

Loan stacking enables business owners to swiftly access capital by applying for and receiving approval for many loans within days often hours. This method is effective because the time it takes to report the loan to credit bureaus is typically significantly longer than the time it takes to get the loan approved and the money in the borrower’s account.

Theoretically, taking out multiple loans at once could be a good move for a company. Loan stacking may seem like a good idea at the time, but it might backfire if your company takes on too much debt.

What Is Loan Stacking?

In order to avoid paying back your debts all at once, you may resort to loan stacking. Maybe there are essentials like rent, utilities, and employee salaries that you need to cover, but you really don’t have any spare cash. 

Perhaps you need additional funding to accommodate the purchase of new stock or the installation of more advanced computer hardware. You make your way to Acme Credit in search of a loan. You submit an application, but you’re only granted a fraction of the funds you require.

The loan application you submitted to Acme is now public information, thus FasterLoans is calling to offer you the funds Acme declined. Loan stacking occurs when a borrower has more than one loan in process at once, such as when a borrower takes out a loan from Acme and then another loan from FasterLoans.

Despite FasterLoans’ ability to provide you with the funds you require, you and the original lender may run into difficulties if you take out a second loan while still owing money on the first.

Is it legal to stack business loans?

Although loan stacking isn’t technically prohibited, it’s often frowned upon for obvious reasons. I’ll start with the fact that loan stacking typically involves at least one person who is dishonest. Unsavory loan servicers may inflate a borrower’s loan volume when reporting payments to a credit bureau.

Lenders who employ high-pressure or dishonest sales strategies to get borrowers to take on more debt than they can afford to repay are a reality that some people have to face. On other occasions, dishonest loan officers will get in touch with you about special promotions just after you’ve already closed on a loan with them.

Similarly, if you need more money than a single lender can or would provide you, you may act hastily. Honest lenders check to make sure business owners aren’t taking out multiple loans at once.

Companies’ requirements for capitalization vary widely. Comparatively, starting a food truck can cost anywhere from $60,000 to $250,000, whereas working from home on website development requires very little capital. And constructing a vehicle dealership or manufacturing facility might cost millions in initial investments in things like real estate, equipment, and permits.

Lenders evaluate a business’s complete financial picture, including its current and projected cash flow, accounts receivable and payable, debt, creditworthiness, and collateral, before extending credit. 

Most lenders won’t give an applicant more money than they can afford to repay at the moment, so long as the applicant can show that they have the financial wherewithal to make the payments.

However, there are loan providers who care more about profits and who offer perks to present loan holders in order to keep them as customers.

How to Recognize Skeptical Lenders Who Permit Loan Stacking

When business owners take out multiple loans at once, they open themselves subject to predatory lending practices, such as unsecured loans or merchant cash advances from multiple sources. These dishonest lenders set up shop in a way that facilitates and even encourages stacking by financially strapped business owners.

They profit from the hard work of the initial lender’s underwriters by focusing on borrowers who have previously been approved by that institution. They aren’t interested in helping you succeed monetarily or developing a lasting partnership with you.

Predatory lending takes the form of promoting loan stacking. The objective is to craft loan packages that might trap borrowers in an endless spiral of debt. They bait borrowers into debts they can’t afford or don’t fully comprehend. This frequently involves imposing unfavorable or abusive borrowing terms on borrowers.

To make a profit, predatory lenders charge exorbitant interest rates, give out excessive loans, and conduct weak credit checks. The purpose of a soft credit check is to review a person’s credit history without negatively affecting their credit score. It conceals the entire extent of the borrower’s debt from potential new lenders. 

When looking for a loan, that is helpful information to have. Your interest rate won’t go up because of a temporary drop in your credit score right before you apply for credit. Although dishonest loan officers may employ it for illegal activities.

In many cases, lenders use automated algorithms that make loan decisions based on these mild credit checks relatively instantly. A borrower can then, at least temporarily, borrow from numerous lenders in quick succession without worrying that any of them will find out.

But reputable financial institutions explicitly forbid their borrowers from stacking loans. They investigate your company’s financial standing thoroughly to make sure you aren’t taking on more debt than you can reasonably pay back. 

They will only provide financing that is feasible for your company, assuring that you will be able to repay the loan in accordance with its terms.

They give you everything you need to complete your homework and make a well-informed choice about the loan. And they go out of their way to gain your confidence and establish solid rapport.

Most reputable financial organizations, including banks, have measures in place to prevent business owners from piling up loans. Hard credit queries don’t show up on a credit report, though, for up to 30 days. This means a borrower can obtain loans from many sources during this time without raising suspicion among the lenders.

How Loan Stacking Affects Businesses

Daily operations necessitate working capital, and some new or struggling businesses will need to borrow money until their cash flow is stable enough to meet their costs. Despite the allure, juggling multiple loans at once might make it harder for businesses to overcome these widespread issues.

Loan Stacking May Be Against the Terms of Your Loan Contract

Banks and other serious lenders are wary to give substantial sums of money to businesses that have no track record of paying back loans. In addition, lenders frequently file blanket liens, which encumber the vast majority of a company’s assets, making it impossible to repay a loan if you’ve piled on more.

A small business that is having trouble making ends meet could apply for credit and end up with several different loans offers to choose from. Acme’s initial proposal of $30,000 falls far short of the $60,000 it would take to launch the company. The Acme loan stipulates that the borrower is not eligible for any other loans until the first $30,000 is repaid in full. 

FasterLoans’ offer of a new loan would put the company in violation of its agreement with Acme if it were to use the funds for anything other than paying off the existing loan.

Loan Stacking Can Lead to a Serious Debt Cycle and Default

It’s tempting to take everything you can get your hands on when things are tough. However, your company’s debt load will rise with every additional loan. As your company’s debt increases, a larger portion of each revenue increase must be allocated to debt service.

Local government information hub Governing conducted an investigation on a California bakery that paid off its four outstanding loans by allocating more than a quarter of its daily cash flow (about $600). 

In other words, the bakery lost potential growth investment capital. As an added downside, a debt trap does more than merely stunt development. The probability of debt default increases as the percentage of income required to service debt increases. 

The bakery owned by Governing, which was in serious debt, closed down as a result. If your company defaults, it could suffer many severe and perhaps catastrophic consequences.

  • Taking a huge hit to your company’s credit rating
  • Putting your company’s assets and maybe your own, if you’ve intertwined the two at risk of liquidation.
  • This will result in the instant due date of the entire loan sum and, most likely, the bankruptcy of your company.

Even if they don’t immediately default or file for bankruptcy, most businesses will find it incredibly difficult to free themselves from the grip of high-interest debt. Your decision to combine loans will have lasting repercussions.

Alternatives to the Stacking of Business Loans

When you’re a new company with no established credit history, it might be discouraging to try to secure further funding. Even if you don’t qualify for the whole amount you need, you don’t have to resort to loan stacking because you still have options.

If additional capital is required, your company and its primary lender should investigate these alternative sources of funding.

1. Requesting Additional Funding From Your Lender

Many lenders are prepared to increase your credit limit if you have demonstrated that you are at a good risk by repaying a sizeable portion of your loan (usually around 50%) or have a history of timely payments. 

With the additional money, you can settle outstanding debts or cover unexpected costs, such as getting a new roof installed on your current building.

If that’s the case, see if your current loan’s fees and/or interest can be canceled. If you don’t pay attention, you could end up having to pay interest on interest.

2. Getting a New Loan

What if you’re currently having trouble paying back a business loan with sky-high interest rates? You had a subpar FICO score and a limited credit history.

But now that business is thriving, you’re confident you can get a low-interest loan with preferential rates and fees. Your current high-interest loan will be repaid with the proceeds from this new loan. This is a form of refinancing that operates similarly to a home mortgage refinance. 

Among refinancing’s many benefits are:

  • Shorter loan term
  • Lower payments
  • The ability to switch from a fixed-rate loan to a variable loan or vice versa
  • Paying off the old high-interest loan

There are certain disadvantages to refinancing, however:

  • High transaction costs
  • Higher interest payments if you stretch out the loan payments over a longer period

Consider the advantages and disadvantages of this approach before making a final decision.

3. Make a Line of Credit Application

For small businesses, lines of credit function similarly to credit cards in that they can be used whenever additional funding is required, such as when making large purchases or taking on a new employee.

If you can’t bank on prompt payment from your clients, a credit line might help you avoid running out of money when you need it most.

A line of credit is a type of revolving credit that allows you to borrow money as needed and typically has higher limits than a business credit card. Lines of credit up to $250,000 are underwritten by BlueVine, for instance.

Over a specified time period, you can withdraw up to a specified maximum amount. Simply put, you only pay interest on the funds you really use, and as soon as you repay them, you get access to them again without delay.

Additionally, a line of credit provides greater payment freedom than a loan. You have the flexibility to borrow money whenever you need it, repay it whenever it’s convenient, and borrow again whenever you like, within the limits of your credit line.

Bottom Line

Borrowing from multiple lenders at once can be alluring. But the promise of a large sum of money spread out over several loans is frequently bogus. Most small businesses struggle to keep up with their debt payments and interest payments due to high-interest rates. Taking out multiple loans at once can be disastrous for your company’s finances.

When it comes to debt consolidation, there are some high-risk lenders who actively encourage loan stacking. However, the majority of reputable lenders believe this practice undermines the entire industry and puts small firms at risk of default.

Some small business owners persist in taking out many loans as long as the approval from lenders is maintained, despite the obvious drawbacks and hazards. Nonetheless, the principal repayment is required at some point. That’s when all your efforts and hopes for the future can come to a grinding halt.

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