As a small business owner, taking out a business loan can certainly help you grow your business. The problem, however, comes if you as an owner fall into the trap of taking out multiple loans at the same time (also known as “loan stacking”). As online lending has become popular, loan stacking has become a growing problem. We interviewed Matt Golden from RapidAdvance to find out more about what loan stacking is and why you should avoid it.
Here’s what all business owners should know.
What is Loan Stacking?
If you still aren’t crystal clear on loan stacking, let’s look at an example. Say that you head over to Rapid Advance to take out a loan. You apply and are granted less than the amount you need. Then, you get an offer from another company who says they will loan you an additional amount. If you take that loan as well, you are loan stacking. It is signing up for more than one loan at the same time.
Why Should You Avoid Loan Stacking?
“There are a lot of things at play, but at the end of the day, we always want to do what is REALLY best for the client, not simply what “looks best at the moment”.-Matt Golden
To understand why loan stacking is a problem, it is important to look at the big picture.
When a loan company approves a loan amount, they are taking into consideration all of the known income and expenses the applicant currently has. This is to ensure that the loan will help the business owner without straining them and so that the loan is likely to be paid for the loan company’s interests.
However, not all companies are ultimately concerned about the wellbeing of their clients if there is a profit to be made. There are various lenders out there who will try and attract current loan holders with the allure of obtaining another loan for more capital. These companies typically have outrageous charges for their funds, so while the client gets a few more dollars, their business struggles to pay back both loans. Matt shared:
“When a business owner stacks loans on top of loans to add to their cash flow, or even worse, takes a loan to pay off another loan, it puts them in a compromised position. Instead of leveraging business loans to grow and expand their business, they will more than likely end up becoming completely reliant on lending to simply stay above water.”
Some companies, such as RapidAdvance, strictly prohibit loan stacking on the grounds that it’s dangerous for the business owner. These are the companies you can trust to have your best interests in mind.
How is Loan Stacking Possible?
If loan stacking is so harmful, how is it even possible? Well, with the growth in the online lending industry fairly recently, there are still some loopholes in the process. Loan stacking is legal, so some companies will still lend to applicants who have other outstanding loans. Some companies, as mentioned earlier, even pursue vulnerable clients who may want help paying off their first loan.
On the other hand, applicants may work the system to try and get as many loans as they can in a short time period. This works sometimes because of a few reasons. Often lenders try to attract new clients with the promise of quick approvals for their loans, normally within a 24-hour period from when they received the application. By doing this, they only run a soft check on the applicant which may not disclose all of their information. Due to the patchy reporting of loans to the credit bureaus, it is also possible for a person with an existing unreported loan to apply without the other loan being considered in the approval and amount loaned.
While it can be tempting to take as much as you can get as a business owner, especially in times of need, restrictions are placed by reputable companies for the best interest of you as well as them. Using loopholes like these puts you both at risk.
So what is a business owner to do if you get approved for an amount that just isn't enough?
Matt Golden shared a more sustainable solution offered by Rapid Advance where loan products are structured with the intent of being able to provide more funding for each business within just a few months. They even offer a better rate for a return client. So if you can borrow and show good faith on your payments, you will be rewarded with a larger amount in the future. Golden closed with:
“It is far more wise for a client to build a relationship with us and build their business through our renewal program, incrementally, while IMPROVING the cost of financing rather than to rush toward more funds that may hurt the possibility for a relationship in the future. Not to mention the latter would cost them a significant amount more.”
There you have it. While you may run into companies promising you the funds you want right now, think twice about what will be best for your business in the long run. There is a fine line between a loan solution that makes financial sense and actually benefits a business and another where the numbers just don’t add up, and it harms the business.